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  1. #1

    New York State Legislature Passes Law That Requires APR Disclosure

    https://debanked.com/2020/07/new-yor...yre-not-loans/

    What are your thoughts on this?How much impact do you believe this bill will truly have on MCA?

  2. #2
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    It will require some more sales skills. Harder to sell something with APR that is impossible to calculate APR, and will confuse many many clients. Will also confuse many many brokers who love "selling" and bait and switch. This will force people to describe factor rates to NY clients for MCA, and discount rates for factoring, very clearly. Anyway these clients look at it as 50% money, they know it's no comparison the bank.

    It will probably prevent a few "sales". Fewer bait and switch, which means less confusion on the merchant's part, which means less defaults?

    Here's what IOU sent me about how to make the customer costs shrink:

    SALES TIP: “Make the numbers shrink.” When you are trying to sell alternative financing, you have to learn about the business, all their sources of debt capital, and how the alternative piece plays into that… in addition to the use of funds discussed in the last sales tip. The key is getting the business decision maker to focus on the weighted cost of capital and not the singular “more expensive” piece.

    With the right perspective, the cost of alternative debt is not that expensive. Most merchants are what I call “accidental business owners...” meaning they were very good at something, (plumbing, selling, inventing, networking) which accidentally lead to a business.

    Accidental business owners do not often separate business ideas and funding from personal strategies aka they think “debt is bad” (personal concept) vs “debt is a low cost of funds” (business concept). Selling business funding requires gently educating merchants on business concepts.

    Businesses are funded with debt and equity. Let’s look at the debt only piece of the pie in this sales tip. Debt capital comes in various forms: from trade lines (B2B “payment terms”), from traditional lenders like banks, from alternative lending sources like IOU Financial, and from other types of sources.

    When you consider a “debt stack,” you also have to consider the “weight” of each piece. This means how much of the pie does a particular slice make up? If you only look at the alternative lending piece, 30% cost of capital can sound expensive, but let me show you how that is not always the case. As we know, the bigger the alternative debt loan, the more difficult it is to close (if the merchant is only focused on the alternative slice.) Let’s focus them on the whole pie and how that slice shrinks when weighted.

    Most strong and healthy businesses do not only have one source of debt. Most take on debt for various purposes: real estate, equipment, inventory, soft costs, vehicles, and so on. To understand the average cost of debt between all sources, you have to take the weighted average.

    If a company has $2,000,000 in total debt and only 25% of that is alternative financing used for inventory and the other sources have a lower cost of debt, the cost of the alternative financing begins to shrink. Yes, the others rise a little, but the weighted average cost is not overwhelming at all. See the chart below. As you can see, 30% cost of capital is not really 30% when you look at it from a total pie and weighted average. Yes, the smaller sources of capital rise a little… 5% becomes 12.25%, but conversely 30% becomes 12.25%... sell that!

    Amount of Debt Weight Annual Cost Weighted Cost Use of Funds
    $1,000,000 50% 7% 3.5% Real Estate
    $500,000 25% 5% 1.25% Vehicles
    $500,000 25% 30% 7.5% Inventory
    Total $2,000,000 100% 42% 12.25%
    Micah Markowitz | mmarkowitz@abfunders.com | 855-33-GO-ABF (direct)

  3. #3
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    Quote Originally Posted by Yuppie View Post
    https://debanked.com/2020/07/new-yor...yre-not-loans/

    What are your thoughts on this?How much impact do you believe this bill will truly have on MCA?
    We don't offer MCA, but this does require factors to disclose the information. That being said, It does not bother me as I typically disclose or am asked to disclose the cost of capital/APR on every proposal. It does not take an abacus to figure out our rates.

    Best,

    KH
    Seacoast Business Funding, a division of Seacoast Bank
    Kevin Henry-VP Business Development
    Kevin.Henry@SeacoastBF.com
    561-623-1872
    www.seacoastbf.com
    Boynton Beach, FL

  4. #4
    Senior Member Reputation points: 5009 @jeannette's Avatar
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    I am with Kevin on this, I disclose the APR and discuss it with the client most of the time. With factoring it is pretty easy to figure out an APR. When you are offering the best rates possible to your clients this new law works in your favor.
    Jeannette Nearing | Business Development Officer| AmeriFactors
    | M (770) 362-2307
    jnearing@amerifactors.com |

    http://www.amerifactors.com
    https://www.linkedin.com/in/jeannettenearing

  5. #5
    How is this supposed to apply to merchant cash advances when there is no fixed term length that can be used to calculate APR? As soon as the merchant bounces 1 payment or requests a day off, the entire calculation changes. Especially when you start thinking about Split/Lockbox deals where the term length is completely dependent on how much the merchant is batching...

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    Would you all mind showing me a working example of how to calculate what they are asking for?

    On deals I am presented with this is how I currently analyze the numbers to be able to compare various deals fairly.

    Example on an 83 weekly deal..
    $105,566.73 total payback / $99,523.33 deposit = 1.060 Effective Rate.
    83 Week Interest rate = 6.0%
    52 weeks / 83 weeks = 0.6265
    0.6265 x 6% = 0.03759 = 3.759% Annualized Factor Rate

    Are any of those number that I have converted for, what NY is asking to be provided upfront? If so which one? Or are there additional calculations that need to be done? If so, could you show & explain how I would figure out the APR ?

    Thanks.

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    Micah Markowitz | mmarkowitz@abfunders.com | 855-33-GO-ABF (direct)

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    yeah very confused here , just take an example of 100k 12 month 1.3 technically it is a 54% apr but with the clause of sales dropping and what is happening now ,so the deal takes you 18 months dropping the apr to 36% and just keep taking the out further and further. so are you just going to write apr from 4-54% .If anything this will make it more deceiving to merchant. What am i missing?

  9. #9
    Senior Member Reputation points: 141593 ryan $'s Avatar
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    Quote Originally Posted by Michael I View Post
    yeah very confused here , just take an example of 100k 12 month 1.3 technically it is a 54% apr but with the clause of sales dropping and what is happening now ,so the deal takes you 18 months dropping the apr to 36% and just keep taking the out further and further. so are you just going to write apr from 4-54% .If anything this will make it more deceiving to merchant. What am i missing?
    exactly.

    What if it is a CC Split? "Guessed APR"

  10. #10
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    Quote Originally Posted by abfunders View Post


    Thanks..

    So the numbers I used to calculate the 7.43% APR is a bit of a moving target and really doesn't mean anything after you get into the deal.

    For example... In my situation the orginal deal was for 83 weeks. But there have been no drafts for about 4 months... So if the drafts restarted at the same amount and frequency, that would add 4 months to the "Number of Months" field. That would then in turn lower the APR, which equals "APR is a moving target" that is only valid for a particular moment in time. Not a number that can govern the repayments in any way.

    So I guess the APR requirement is so that a merchant can get a visual representation of a value that they may be more familiar with..

    But at the same time the merchant must understand the APR does not have the same power in a MCA product vs the Loan product the merchant maybe more familiar with.
    Last edited by Winning; 07-24-2020 at 01:41 PM.

  11. #11
    I recently got out of the industry but I keep an eye on what's going on. Here's me giving back - it's an APR approximator for MCAs - it will agree to the Breakout Capital calculator that was posted here so you can check my work.

    As has been stated in this thread, APR on an MCA doesn't make sense given the lack of a contractual duration and variability of repayment velocity, however if you have to disclose APR - this will tell you the expected APR of a perfect payer. Use this at your own risk.

    Hopefully this can help someone. Hit me up in the DMs if you have any questions.

    Capture1.png

    APR Calculator.zip

  12. #12
    ...
    Last edited by QFSCapital; 08-04-2020 at 04:29 PM.

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    so the ILPA that claims it shaped this law in NY , are formed by companies mainly offering business loans through chartered banks. the agreements come with language of who the bank is. the PG is also a personal guarantee not a performance guarantee. Did NYC group MCA's into loans? If it's a true split repayment from cc sales with ebb and flow repayments, this may be tough for those companies. For the ILPA, they had no choice but to follow compliance since B of I, Finwise, Web Bank etc all require this

  14. #14
    Quote Originally Posted by TheUnderwritingProdigy View Post
    How is this supposed to apply to merchant cash advances when there is no fixed term length that can be used to calculate APR? As soon as the merchant bounces 1 payment or requests a day off, the entire calculation changes. Especially when you start thinking about Split/Lockbox deals where the term length is completely dependent on how much the merchant is batching...
    It appears they have considered this and provided a mechanism for estimating APR, per the text of the bill:

    55 (c) The estimated annual percentage rate, using the words annual
    56 percentage rate or the abbreviation "APR", expressed as a yearly rate,
    (f) any person or provider who makes no more than five commercial financing transactions in this state in a twelve-month period; or
    (g) an individual commercial financing transaction in an amount over

    A. 10118--A 4
    1 inclusive of any fees and finance charges, and calculated in accordance 2 with the federal Truth in Lending Act, Regulation Z, 12 C.F.R. §
    3 1026.22, based on the estimated term of repayment and the projected
    4 periodic payment amounts. The estimated term of repayment and the
    5 projected periodic payment amounts shall be calculated based on the
    6 projection of the recipient's sales, called the projected sales volume. 7 The projected sales volume may be calculated using the historical method 8 or the opt-in method. The provider shall provide notice to the super-
    9 intendent on which method they intend to use across all instances of
    10 sales-based financing offered in calculating estimated annual percentage 11 rate pursuant to this section.
    12 (i) The provider using the historical method shall use an average
    13 historical volume of sales or revenue by which the financing's payment
    14 amounts are based and the estimated annual percentage rate is calcu-
    15 lated. The provider shall fix the historical time period used to calcu-
    16 late the average historical volume and use such period for all disclo-
    17 sure purposes for all sales-based financing products offered. The fixed
    18 historical time period shall either be the preceding time period from 19 the specific offer or, alternatively, the provider may use average sales 20 for the same number of months with the highest sales volume within the 21 past twelve months. The fixed historical time period shall be no less 22 than one month and not exceed twelve months.
    23 (ii) The provider using the opt-in method shall determine the esti- 24 mated annual percentage rate, the estimated term, and the projected
    25 payments, using a projected sales volume that the provider elects for 26 each disclosure, provided, that they participate in a review process 27 prescribed by the superintendent. A provider shall, on an annual basis, 28 report data to the superintendent of estimated annual percentage rates 29 disclosed to the recipient and actual retrospective annual percentage 30 rates of completed transactions. The report shall contain such informa- 31 tion as the superintendent, by rule or regulation, may prescribe as
    32 necessary or appropriate for the purpose of making a determination of 33 whether the deviation between the estimated annual percentage rate and 34 actual retrospective annual percentage rates of completed transactions 35 was reasonable. The superintendent shall establish the method of report- 36 ing and may, upon a finding that the use of projected sales volume by 37 the provider has resulted in an unacceptable deviation between estimated 38 and actual annual percentage rate, require the provider to use the
    39 historical method. The superintendent may consider unusual and extraor-
    40 dinary circumstances impacting the provider's deviation between esti-
    41 mated and actual annual percentage rate in the determination of such 42 finding.

  15. #15
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    Quote Originally Posted by ryan $ View Post
    exactly.

    What if it is a CC Split? "Guessed APR"
    Technically yes since there is not a definitive term - there is an expected turn based upon past performance,
    not a guarantee of future performance.

    It is a meaningless Law passed by uniformed politicians
    Dave Lambert
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    Projected Sales Volume - Therefore the funder needs to be a mind reader
    Dave Lambert
    FC Financial LLC
    dave@fcbankcard.com
    http://www.fcbankcard.com
    1-727-291-7890 (Text or Leave Message)
    Office: 727-233-1111


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    Quote Originally Posted by Yankeeman07 View Post
    Projected Sales Volume - Therefore the funder needs to be a mind reader
    Hardly a "mind reader". Everyone has an idea or estimate of sales volume when they underwrite, price and fund a deal. Estimates can be incorrect but they do exist. To deny that would be ignorant.

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    Quote Originally Posted by Yankeeman07 View Post
    Technically yes since there is not a definitive term - there is an expected turn based upon past performance,
    not a guarantee of future performance.

    It is a meaningless Law passed by uniformed politicians
    I wouldn't say meaningless. The real "point" of this law is to give make MCA look bad.

    Most people don't understand factor rates.

    When media/politicians start seeing contracts that say 50-500% APR that's when all hell will start to break loose.

    That's the real goal here. Put MCA in terms that don't apply to it to harm the industry.

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    unless they are trying to create leverage for usury cases this changes nothing. Even so, there's precedent already set by many judges and courts.
    honestly if the merchants see 300% apr on the agreement they would be taken back at first, then will become much more digestible after they do the math themselves. Most people are very analog and like to keep it simple. "This 30k will cost me 40k estimated 8 months from now. how long will it take to see profit" or "the payments will most likely be $5k per month (estimated) and this truck will bring me 10k per month"

    anyway, time is money for all small businesses. more expensive money right now is more valuable then cheaper money later, that is if the banks want to give money, in my opinion.

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    it will no question open up more compliance ,costs , and future litigation in NY now.

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