Why Should I Care if They Only Factor Credit Card Receipts?

Where there’s yield, there’s interest (no pun intended). Every Tom, Dick and Harry with two nickels to rub together leaped into the MCA ring to get a piece of the action. Also, since most retailers are relatively small (restaurants, dry cleaners, hobby shops, specialty boutiques, etc.), the size of the loans weren’t very big. At first, MCA’s wouldn’t make a loan above $25,000. And why would they? All they had to do was generate 10 loans at $15,000 each to earn $150,000 per annum, a comfortable living by most people’s standards. So you didn’t need to have much invested and the risk seemed very manageable given the return. As the market got more and more crowded, growth got harder to come by. Some enterprising MCA realized that retailers not only have credit card sales but also cash sales. And with the advent of the Automated Clearing House (ACH) system in banking, merchant checking accounts could be easily and cheaply debited every day to repay the advances made against the cash sales. Now with daily debiting a standard process in the MCA world, it didn’t take long to recognize that there was still one last area of payments that they could exploit, those B2B and B2G transactions that make up our factoring livelihood. The thundering hoard was approaching.

What This Means for the Factoring Industry

Ten years ago, virtually none of our clients accepted credit card payments. Today however, nearly all of them do. They had to purchase their processing equipment from an ISO, who is selling the MCA financing product as hard as they can because the commissions are incredibly lucrative. To make matters worse, MCAs use short online applications and just as short documentation, which makes the on-boarding process quicker and easier than dealing with us. Although our receivable factoring business is more complex and really can’t run like the MCA model, this only starts to make a difference as the loan sizes increase (and the risk goes up). So I expect the biggest impact of the MCA invasion to come at the lowest deal size range (under $50,000). But remember, these guys are gunslingers. Therefore, sooner or later they’ll be gunning for more. We’ve already seen three separate MCAs provide money to existing factoring clients in the last year. All three used Factoring Agreements (not exactly like ours, but “purchasing future receivables” none the less). Two required blanket first position liens in the documents (which of course was impossible since we were already in first and they had no intention or ability to pay us off). Only one of these two actually filed a UCC1. All three caused our clients to be in default of their Factoring Agreements with us. As pointed out earlier, these MCAs don’t care much for rules.

That of course is the competitive threat. Like all clouds, there is a silver lining. MCAs will advance in second, third or even with no lien position. So we can use these providers to our advantage. If a client needs $25,000, $50,000 or even up to $250,000 quickly, but you don’t have the availability, you can refer in one of these MCAs who will provide the needed money to just about any business that’s been around over a year (they need bank statements to show what the average daily bank balance is so they can determine how much they can debit each day, which they then back into how much funding they are willing to provide). Plus, they’ll fund even in the face of other lien holder issues. Consequently, they can help keep you from having to fund outside of your comfort zone. Otherwise, you might be stuck having to make a very difficult gamble. Additionally, let’s not forget that at their yields our form of factoring looks cheap!

Conclusion

The MCAs have better access to our market than we ever did or ever will have through the ISOs. Further, some of them are also backed by the largest hedge/private equity funds in the world. These Funds have voracious appetites for growth, more so than any factoring company we’ve encountered before. While the market is vast, it may still not be big enough for the both of us. They’re fast, they take bigger risks than we do and they can be lawless. And they’re moving in. There will surely be a showdown at some point. In the words of the great Wyatt Earp at the OK Corral, “It’s not necessarily the one that shoots first, but the one that shoots best."