[jotucker1983]

Somewhere in the financing food chain is a senior debt lender (a bank) that feels that every single merchant advance (even 1st position A paper) is questionable and will no doubt hurt cash flow. To them, there is absolutely no good reason the business should resort to a cash advance, as it puts its own lending facility at risk.

So why the arbitrary line at 1-2 advances? And why at a percentage of revenue (as each company’s margins are different)?

I would argue that the bank is correct in feeling how they feel. This industry used to be based on purchasing future credit card receivables without a fixed payment associated with the payback period. We morphed into a fixed payment arrangement, which is fine, but that fixed payment arrangement should be structured in a way that allows a merchant enough "breathing room" to not potentially negatively effect him in paying other due expenses of his business.

Let's break this down:

- Merchant is doing $1 million a year in gross sales ($83,000 a month in sales) with a risk profile that puts them at A or B Paper

- Merchant is approved for $75,000 on a 15 month term with a cost factor of 1.30. Fixed payment comes out to 315 business day payments of $310 over the 15 months.

- This represents $6,510 per month in payments coming out that's going towards paying back the program, or about 8% of the $83,000 monthly gross sales.

- To the bank's point, this merchant can still default with this, but a majority chunk of merchants in this situation should have enough breathing room to where the program can be managed and paid back on time (in reasonable fashion).

- Now, when you stack the following advances below, things change:

* 2nd Position: $25,000 at 1.35 over 5 months, which is 105 business day payments of $321 ($6,741 per month in payments)

* 3rd Position: $20,000 at 1.45 over 5 months, which is 105 business day payments of $276 ($5,796 per month in payments)

* 4th Position: $15,000 at 1.45 over 4 months, which is 84 business day payments of $259 ($5,439 per month in payments)

The additional stacks have now added $17,976 in monthly payments, which combined with the 1st position of $6,510 this merchant is now paying about $24,500 per month in advance payments, which represents 30% of his monthly gross sales.

So 30% of his monthly gross sales are going to pay advances. That's not a lot of breathing room and this merchant is dangerously close to getting into bankruptcy territory.

This merchant clearly was unsophisticated both personally and business wise, but instead of our industry stopping this merchant in his tracks (telling him NO, no more funding, you can't afford it), we instead continued to feed him more "drugs" at his long term disposal and at our short term benefit.

[WestCoastFunding]

I would argue that the bank is correct in feeling how they feel. This industry used to be based on purchasing future credit card receivables without a fixed payment associated with the payback period. We morphed into a fixed payment arrangement, which is fine, but that fixed payment arrangement should be structured in a way that allows a merchant enough "breathing room" to not potentially negatively effect him in paying other due expenses of his business.

Let's break this down:

- Merchant is doing $1 million a year in gross sales ($83,000 a month in sales) with a risk profile that puts them at A or B Paper

- Merchant is approved for $75,000 on a 15 month term with a cost factor of 1.30. Fixed payment comes out to 315 business day payments of $310 over the 15 months.

- This represents $6,510 per month in payments coming out that's going towards paying back the program, or about 8% of the $83,000 monthly gross sales.

- To the bank's point, this merchant can still default with this, but a majority chunk of merchants in this situation should have enough breathing room to where the program can be managed and paid back on time (in reasonable fashion).

- Now, when you stack the following advances below, things change:

* 2nd Position: $25,000 at 1.35 over 5 months, which is 105 business day payments of $321 ($6,741 per month in payments)

* 3rd Position: $20,000 at 1.45 over 5 months, which is 105 business day payments of $276 ($5,796 per month in payments)

* 4th Position: $15,000 at 1.45 over 4 months, which is 84 business day payments of $259 ($5,439 per month in payments)

The additional stacks have now added $17,976 in monthly payments, which combined with the 1st position of $6,510 this merchant is now paying about $24,500 per month in advance payments, which represents 30% of his monthly gross sales.

So 30% of his monthly gross sales are going to pay advances. That's not a lot of breathing room and this merchant is dangerously close to getting into bankruptcy territory.

This merchant clearly was unsophisticated both personally and business wise, but instead of our industry stopping this merchant in his tracks (telling him NO, no more funding, you can't afford it), we instead continued to feed him more "drugs" at his long term disposal and at our short term benefit.

Literally none of this matters if we don’t know their margins. Either there’s enough there to debt service or there isn’t. Not to mention the margins for a consulting company is going to be much different than a restaurant?

So again I’m asking, what percentage of gross sales are you saying is too much? Provide a number. 10%? 20%? 40%?

Then, how do you write that into law?

[jotucker1983]

Literally none of this matters if we don’t know their margins. Either there’s enough there to debt service or there isn’t. Not to mention the margins for a consulting company is going to be much different than a restaurant?

In relation to margins, a couple of points:

- The majority of MCA related fundings do not require the submission of financial statements, nor tax returns, nor a current debt schedule. Those are usually required when the funding gets over $100,000 to $250,000 or if you are submitting to a A+ Paper Funder/Lender.

- Based on this, isn't it reasonable to assume that right now, we really don't know much about the margins of the majority of merchants being funded?

- In addition, there's a reason why the standard 1st position approval is usually no more than 10% to 15% of the annual sales volume. It's baking in the ability of the merchant to reasonably payback the MCA related product and service their other liabilites. If the merchant's other liabilities were never taken into play, why not just approve a merchant for 50% to 75% of their annual gross sales? So a business doing $1 million a year in funding gets $500,000 to $750,000?

So again I’m asking, what percentage of gross sales are you saying is too much? Provide a number. 10%? 20%? 40%?

Then, how do you write that into law?

- If it were based solely up to me, I would put the absolute max at 20% across the board.

- When a merchant takes out one of these programs, there would be a required filing (other than a UCC) that takes place within a centralized database that is only accessible by regulators and licensed lenders/funders.

- This database would be checked upon application submission and if a licensed lender/funder is caught exceeding the limit, they can be fined or have their licensed revoked.

At the end of the day, the "alternative" nature of this industry is rapidly consolidating with the "conventional" side of lending. We are going to get higher forms of regulation anyway, the best thing to do is acknowledge this and try to help write the policy.