What will it take to stop the economic destruction by subprime lenders?

As small business owners across America layoff their employees, and one business after another goes under, consumers continue to dramatically reduce their spending, and in more general terms, America is heading into the deepest recession anyone has seen for many many years.

Even with the trillions of dollars the government are trying to pump into the financial system, clearly there is no easy fix to the great havoc and economic destruction the Sub Prime mortgage industry has brought down upon the heads of all types of Americans, lower, middle and upper class are all suffering from the current economic crisis.

For those of you who do not yet know, you can read about how the sub prime mortgage industry caused todays economic crisis and recession by clicking here.

During times of great economic crisis there is always great opportunity too, with stock prices lower then they have been in many years, and house prices across the country (yes, even new york city now) tumbling, for those that have plenty of capital to invest, and can wait 5-10 years for a nice return on investment, this is the time to buy buy and buy some more.

But most of us do not have large amounts of capital to play with, and one would think that with all the ugly truth about where the sub prime mortgage lending has taken us & the major global financial crisis it has caused, now very much in the open, the massive government interventions and bailouts, the anger of Main St towards Wall St, and the level of unemployment rising rapidly, someone would put an end to the types of lending practices that got us into this horrible and painful mess, right?!?

Well unfortunately a very dangerous type of predatory sub prime financing that is sucking the last drops of blood out of the many small and medium American businesses during this very difficult time, is very much alive and well.

As the major banks  have dramatically reduced their lending to businesses, the MCA Merchant Cash Advance industry now has the opportunity to not only lend to small, desperate, and very weak businesses that do not understand the most important financial numbers that rule their businesses viability & ability to survive, but also to expand their potential customer base to bigger and more financially stable businesses as they struggle and face the toughest financial & emotional business choices in many years, to get the cash they need to meet payroll and cover cash flow shortages.

So, while only a few MCA lenders have shut their doors, others boast of moving into larger spaces, "rapidly growing organization experiencing a 300% growth in staff size in the last 12 months."  Some are hiring additional sales and back office staff to handle the increase in demand, and others are implementing default interest rate increases on all new loans to merchants by 200-300 basis points just because they can.

So while America deals with great economic pain and difficult decisions, others rejoice in their ability to get richer (as long as this lasts for them - it will not last long term) and take further advantage of small and medium businesses, whilst the government and the people of America sit back and do nothing to stop the very type of lending poison that has already killed so many great American businesses and jobs.

What will it take to stop this destruction of our entire economy by subprime lenders?

AdvanceMe Patent

It is interesting to watch the heated discussion between Merchant Cash Advance providers about the AdvanceMe patent and its attempt to "own" the Merchant Cash Advance space.

Because if you think about it, what is the fighting about? it seems clear that the fight is over a patent for a business financing model that is destroying small American businesses just as the sub prime mortgage companies played a significant part in destroying many American families and the American economy in general.

When will our government finally outlaw this type of aggressive predatory lending?

144% APR

It has been a while since I last posted news about the dangerous and deceptive Merchant Cash Advance industry.

We have been working mainly behind the scenes with a group of Merchants and Journalists who have provided the resources needed to fight this horrible MCA disease which is helping to cripple and destroy many more American businesses on a daily basis, (as if the bad economy was not enough for businesses across America to deal with).

We have made progress, since my last post many Merchant Cash Advance providers have shut their doors due to the work we have been investing as a group.

There are still many Merchant Cash Advance providers who continue to destroy American Businesses and we will continue to work towards our goals.

Some in the Merchant Cash Advance business would really like you to believe that what they are doing is somehow better or OK because they are not charging fees such as closing fees, consulting fees, finder's fees and/or personal service fees (PSF). and that "you can easily make a lot of money in this business".

But even without those fees the money they are offering businesses has an annual cost to the merchant of about 144% APR ( around four times the cost of even the most expensive credit card cash advances) and is just as harmful to businesses across the country, especially during this recession as merchant struggle to pay for rising costs, gas prices, food prices, slow sales and more.

RapidAdvance entering Canadian market

RapidAdvance entering Canadian market

RapidAdvance LLC, a provider of merchant cash advances, is expanding into Canada.

Bethesda-based RapidAdvance has partnered with Advantex Marketing International Inc. to sell and market its merchant cash-advance program to Canadian small and medium-sized business owners who need access to funds to support their growth, purchase inventory or reduce their debt.

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Another example of hungry Merchant Cash Advance lenders trying to branch out to Canada, this comes as demand for Merchant Cash Advances in the USA is starting to dwindle, and MCA lenders find that they cannot dish out as much money into the market as their investors expect.

Merchants are becoming better educated about the pitfalls of this product, and increased competition from the many brokers hammering the phones of businesses across the country trying to make lots of money from the small amount of business owners that are desperate enough to take this super expensive & often usurious money.

Merchants & Media

I have been contacted by many merchants who have been victims of the Merchant Cash Advance scheme, as well as a few media journalists who are working on articles relating to Merchant Cash Advance type Business Loans.

Please continue to send your emails with your stories, the power of many will make a diffrence.

I will be making some predictions about the Merchant Cash Advance industry in the near future.

Consumerist.com may be doing some undercover work in order to expose some of the MCA lenders and brokers practices.

Comment posted on Forbes.com

This speaks for itself.

Comment posted here on forbes.com

Posted by bmorgens | 02/01/08 09:44 AM EST

In the interest of good journalism I am rebutting this story. Obviously to make news readable the media often distorts and sensationalizes the facts. As in any industry there are abuses and marginal players. There are a number of professional players in the MCA field and I will limit my comments to our company; Sterling Funding LLC: We at Sterling go out of our way to protect the merchant and we train and insist that our people who market this product adhere not only to full disclosure of the costs but will also advise the customer against using this product if it will not help the business.

Let's take Maureen's comments which unfortunately are just not accurate.

1. "These lenders of last resort, popping uup at the tech crash in 2001". First of all we have many clients who have good credit ratings and who have other resources but because they want to keep these in reserve and the PROJECT WILL BE A PROFITABLE ONE they go with the short term funding that we offer. MCA started some time before; companies such as Clever Ideas and others were doing this in the 90's. I personally have been infovled with MCA's since the 90's and can tell you it had absolutely nothing to do with the tech crash.

As to demand increasing, this is a logical outgrowth of a successful product that is maturing and becoming more well know. Ironically it is being promoted in many cases by the merchants themselves. David Goldin from AmeriMerchant (an excellent operator and competitor) is undoubtedly getting many of these calls from his own customers. A little research on Maureen's part would have shown that customers renew at a close to 75% rate. If this was such a bad product do you think the renewal rate would be so high?

(Blog editors note: see here...)

To compare this product to a loan product is really misleading and unfair. It is fee based and a markup with the problem being that the cost and markup are open for all to see. Why doesn't the author of the article put in a comment about their "sizzling" interest rate?

(Blog editors note: see here...)

Posted by bmorgens | 02/01/08 10:01 AM EST

Continued. (Sterling Funding)
We are also careful to approach higher markup operations and also make sure that they use of the money will return a profit to the customer. We and I am sure others stay away from low markup industries. As an aside when you shop in a store or eat in a restaurant you don't see their markup posted anywhere. Our is and it is readily disclosed. To compare our industry with "pay day lenders" is unfair. Business people know their costs and again can use the money to improve their business and make it prosper. Also nobody in the MCA field is making a killing. The net profits fall into the range of any well run business, with those that are marginal destined to failure. The comment that a business doesnt survive because of MCA is patently false and self serving. Talk to businesses that have and now us our service and you will get a true picture of the industry.

Bill Morgenstein, SVP Sterling Funding.

Merchant Cash Advance Renewals

So what happens to a merchant small business owner after they take out a Merchant Cash Advance type of business loan?

It is widely reported in the Merchant Cash Advance industry that at least 65% or more merchants return 3 to 4 times to take additional financing for their business.

Why are they returning so many times?

Because of the way these cash advances are structured, each month the merchant is left with less money as they pay approximately 16% of the original amount funded plus the fees (cost of the money) so after just 3 months they usually have less than half of the original funded amount remaining.

Now that their business is hurting even more, and they need even more money they are in a state of desperation, and they come back for more, willing to pay whatever it takes to get more money into their bank account.

Then often they start borrowing from other Merchant Cash Advance lenders, sellers and brokers to pay off their original lenders or brokers.

Usually after 3 or 4 times, either the merchant realizes just how much the fees are hurting their struggling business or they are sadly no longer in business.

Are small business owners stupid? No!

Comment Anonymous said...:

Let me guess, you are an academic who never had to make payroll or struggle for capital.

The tone of your blog paints anyone who has taken this type of capital as stupid or foolish.

I am glad to have the opportunity to make a choice between "expensive" capital and none at all. Without this type of loan, who would give me the money to grow my business, the bank? The mortgage industry? you?

Do you remember how the free markets work? Capital flows in because these companies can make a profit and do not have to worry about regulation created by beaurocrats to protect me from myself. If there is a great demand, it is because there is a great need not being met.

I am a small business owner and collectively I'm the largest employer in the Unites States. Please do not insult me with your blog. Give me credit for having the ability to make an intelligent business decision without your whinny, condescending comments.

thank you

February 1, 2008 4:51 AM

Reply:

Small business owners are not stupid and this blog does not attempt to give that message.

There may be a small number of small businesses that are purely seasonal that may benefit from this type of very costly financing, overall the small businesses that use this type of business loan / merchant cash advance only represent perhaps 5-10% of the users.

The rest are small business owners who sometimes feel that they need money to keep their small business ship from sinking, and they can get desperate enough that their emotions overrule their ability to think clearly and fully understand what they are being charged and how it will most likely effect their business and profitability.

That is where the Merchant Cash Advance Business Loan sharks come swimming out of murky waters to take advantage of these small business owners, especially in time of economic slowdowns and recession.

You sound like another Merchant Cash Advance broker that is trying to portray the type of business owner that takes this form of financing, as intelligent and business savvy, when you know that the goal is to get them to put as much money in your pocket as possible, and then come back to you for some more before they go bust.

You also would like people to believe that Merchant Cash Advances are a legitimate and fair type of financing, but you most probably know, somewhere in the back of your small business brain that it is not.

There are also the many smoke & mirror sales tactics that are most common in the Merchant Cash Advance industry some of them are explained in this blog, others will be explained in the future.

Merchant Cash Advances, Rip-off credit card processing accounts and highly expensive processing terminal equipment leases sucks out the remaining lifeblood from a struggling business.

You may as well of written your comment about intelligent homeowners struggling to own a home, taking out subprime mortgages they could not afford.

When credit gets tight, the vampires come out.

Here is a good article that hit Forbes Forbes.com today!

"When credit gets tight, the vampires come out.

Now feasting on small businesses is a cadre of "merchant cash advance" (MCA) shops. These "lenders of last resort"--which started popping up after the tech crash in 2001--give small businesses cash today in return for a percentage of their future credit card sales. Annualized cost of that precious capital: in the neighborhood of 70% to 90%."......

Click Here to read the full article...

Finally an honest article by a major press organization that covers the usurious practices of the MCA Merchant Cash Advance / Business Loan industry.


"And it's not just California. Kennesaw, Ga.-based AdvanceMe, one of the first and largest MCA shops, claims a 75% uptick in new customers during the same time frame, while Manhattan-based Merchant Cash & Capital boasts a 20% increase.

"Demand is off the charts right now," says David Goldin at AmeriMerchant, another MCA based in Manhattan. "We're not even directly marketing to people. They're finding us now."

Business is so good that hedge funds are piling in, too. Greenwich, Connecticut-based Patriot Group owns a stake in Merchant Cash & Capital, for example. Other players rumored to be investing in the MCA business are Goldman Sachs (nyse: GS - news - people ), Deutsche Bank (nyse: DB - news - people ), Plainfield Asset Management and Silverpoint Capital.

"We've had unsolicited offers from at least six hedge funds," says Irish. Goldin says he receives at least one call a day from interested investors."

The Green Sheet

Click here to read an article by the famous Green Sheet on merchant cash advances.

As can be expected from payment processing industry media, the article attempts to whitewash the cost of the money etc.

Overall though it is a straightforward article about the reality of the Merchant Cash Advance / Business Loan industry.

Canada & United Kingdom

The United Kingdom & Canada are beginning to see Merchant Cash Advance / Merchant Small Business Funding companies open up, and marketing activities and offers rising, merchants in England & Canada can expect their phones to be pounded with offers for this type of financing, hopefully they will discover the truth about the cost of the money and will not fall into the trap many small American businesses have suffered from in an ever expanding way mainly over the last 2 years.

This dangerous merchant financing option is spreading rapidly around the USA, Canada, UK & Europe with the involvement of national banks and international investment banks.

More to come, Scroll to end of blog...

More posts will follow, scroll to the end of the blog to read the posts in the order they were written.

So who is selling this insanley costly money?

There are at least 3 separate types of sales groups selling these crazy cash advances.

1: Companies that opened up to specifically sell this new type of financing. generally referred to as Merchant Cash Advance Companies.

2: Sub-Prime mortgage companies who have moved into this space as a result of the mortgage meltdown.

3: Almost the entire Credit Card Processing industry, some sell it because there is demand from some of their merchants, and they do not want to lose those merchants to other companies, who will provide the cash advance and takeover their credit card processing accounts.

Some do it because they want to make big commissions at the expense of desperate small business owners.

4: Anyone with a decent amount of ethical responsibility would advise their merchants very strongly not to sell their future revenues at such a ridiculous discount.

So what is the corresponding APR on these loans?

Well, the cheapest merchant cash advance loans cost the merchant 1.12 ($10,000 costs $11,200) if paid back evenly over 6 months, the equivalent APR which is the ANNUAL PERCENTAGE RATE is 48% APR.

The much more popular Merchant Cash Advances usually cost at least 1.35 ($10,000 costs at least $13,500) the corresponding APR would be about 142%+, if structured with an APR!!!

Confusing right?

Yes it is. and supposed to be confusing for the merchant so that they do not realise just how much they are paying back for thier short term cash advance.

I will try to explain, with a normal bank loan or credit card where the Annual Percentage Rate is for example 12%, that 12% is charged over 1 full year on the money actually outstanding/owed during that year.

So if you were to keep the full balance, and then pay back the loan in full at month 6, you would of paid a 6% (of the entire amount originally borrowed) cost for that money.

If you pay back all or a portion of the money owed, you are paying the 12% spread over the entire year, and only 12% on the amount actually owed. the less owed at any time, the less you are paying 12% on, you are not paying 12% of the amount that you may of owed the day you took out the loan.

A $10,000 bank loan at 12% APR would only cost you $1,200 if you did not pay back anything the entire year, it would only cost you a full 12% fee of $1,200 per year, if and when you continuously owed the full amount of $10,000 the entire year. because the 12% APR fee is charged on the BALANCE AMOUNT OWED not on the amount written on the original loan check.

With Merchant Cash Advance however, the Fee of 12% to 45% charged over 6 months is charged as a fee, as if you owed the entire amount without paying anything back the entire term of the loan. and it is usually paid back over 6 to 9 months not a (annual) year.

When you compare the fees charged on Merchant Cash Advances to what you would pay on a real 12% to 45% APR loan which was paid back evenly over 6 months, you end up with a much larger 48% APR to 142%+ APR bank loan equivalent.

You then have all the additional charges such as Closing Costs, Leases & Processing Fees all stacked together often helping a desperate or unhealthy business fail.

How long did you say the Cash Advance is provided for?

The Cash Advance funding is usually structured to last just 6 months! sometimes 9 months is allowed but the money costs more, often increasing the cost to 1.45 ($10,000 cost $14,500).

What merchants and even some sales agents do not realize is, that the merchants are often paying $3,500 or $4,500 as a fee or interest on $10,000 when they only are able to use the full $10,000 for just a few days, with each and every sale that the merchant makes, which is charged to a customers credit card, a portion of the sale (often 15%-25% of each sale) is split from the sale to repay the cash advance.

So over just 6 months the $10,000 is being rapidly paid back to the Cash Advance provider.

On a $10,000 advance at a cost of $13,500 for 6 months, the Merchant is usually paying back $2,250 each month!

How much commission do cash advance companies pay brokers & partners?

Cash Advance companies pay anywhere from 4% of the Cash Advance amount for the much less common but cheaper loans (1.12) and up to approximately 14% of the pay-back amount on the more typical and more expensive deals which cost 1.35 to 1.45 to the biggest sales organizations.

The amount paid back on a cash advance of $10,000 is anywhere from $13,500 to $14,500 on an advance which is paid back over just 6 months.

Currently the most common amount paid by Cash Advance companies to sales organizations is approximately 10% of the pay-back amount, and structured so that 8% is paid upfront at the time that the merchant receives the money, and 2% is paid as a residual payment as the merchant pays back the loan successfully.

In house agents (usually working on a 1099 although they should be W2's) working for a sales organization usually see 1.5% to 2.5% of the pay-back amount as a commission depending on the funding volume or expiriance of the agent.

Outside agents that cover their own marketing expenses and submit deals to a sales organization are usually paid up to 7% of the pay-back amount as a commission.

Agents make more money by pushing new processing terminal leases and closing costs.

What else does it cost?

There are other ways these sales organizations and agents make money.

1: in order to collect the portion of future credit card sales revenue that goes to re-pay the loan / cash advance, usually the merchant must switch their credit card processing service to a processing company that has a split funding relationship with the cash advance company. this agreement ensures that the portion of revenue that is supposed to go towards paying back the loan / cash advance is split correctly as the merchant accepts credit card payments.

Pricing on credit card processing is so complicated, tricky and unclear in most cases, that often the agent selling you the credit card processing agreements does not properly understand the pricing themselves.

And that is where the opportunity to make more money comes in, without the merchant understanding what is being charged, when & why.

Often the agreement will be priced with many useful and profitable items such as a Downgrade surcharges of 1%-2%, cancellation fees of $300-$500 are not uncommon and monthly minimum fees and annual fees to name just a few.

2: Often the merchant will be told that their current processing terminal is insecure, or that it will not work with the new credit card processing relationship, and leasing a new machine is encouraged, Processing terminals when purchased online cost roughly $100 for a simple terminal $250-$300 for an advanced terminal, and $800 for a wireless terminal.

The leases sold on simple terminals usually cost the merchant anywhere from $35 to $150 per month for 24-48 months!

Can a merchant pay less?

There are a few companies that will provide the cash advance for less.

At least once Merchant Cash Advance company provides cash advances to businesses (some states are excluded) at a cost of 1.12 when they payback period is structured to last exactly 6 months ($10,000 advance costs $11,200), they're product offering is actually officially a loan (not disguised as factoring) and they are registered lenders. but they represent only a small amount of the cash advances sold daily in the USA.

Then there are a few companies that will sell Cash Advances at a cost of 1.22 to 1.35 ($10,000 would cost a merchant anywhere from $12,200 to 13,500).

The reason they fund only a small amount of the cash advance deals even though they are much cheaper then most other Cash Advance companies, is because they're commissions are smaller.

Just like the Sub prime mortgage industry, the sales organization or agent is paid lesser commissions on the cheaper loans. the larger commissions are paid on deals that cost the merchant a lot more money.

How much does the Cash Advance cost?

In most cases the cash advance is provided at a cost of 1.38 ($10,000 advance costs $13,800) or more.

Often the Cash Advance company will offer different amounts of money to the merchants depending on how much the merchant is willing to pay, so for example if a merchant wants the loan / cash advance to last 9 months (instead of the typical 6 months) the money can cost 1.45 ($10,000 would cost $14,500)

A common tactic used by many sales agents and organizations is to then slide in paperwork (usually an ACH withdrawal agreement) that charges the merchant an additional closing cost (sometimes called one of the following: Origination Fee, Risk Assessment fee, Professional Service Fee, Broker Fee etc).

This closing cost is typically 5% to 10% and goes directly to the sales agent or organization in addition to the commissions that are paid by the company actually funding the merchant.

This can bring the cost of a common 1.45 deal to 1.55 ($10,000 will cost the merchant up to $15,500) over just 6 months!

What Is Merchant Cash Advance?

Merchant Cash Advance is a type of business loan which is usually presented as being a factoring product, where a Cash Advance company will review a merchants credit card processing statements in order to determine how much revenues are coming into a merchants business via the merchants credit card revenues / payments / sales, (they will also look at how much revenue is streaming into the business from cash & check payments / sales) they then purchase future credit card payments to the merchant at a discount.

For example: if a merchant is processing an average of $10,000 each month, when the merchant is approved the cash advance company will pay the merchant $10,000 (essentially giving the merchant a $10,000 cash advance) for anywhere from $11,200 to $15,500 (or more) of their future credit card sales income.