A Note from Lauren

I received a call yesterday from a merchant looking for Merchant Cash Advance. When I asked the merchant what they were going to use the money towards, they said it was for Christmas inventory. I have to say I was shocked (in a good way). I am used to receiving the Christmas inventory calls in November as merchants are usually very busy and procrastinate searching for the necessary cash flow to sustain their business over the holiday season. That being said it is pertinent to start thinking about Christmas early this year as it is the busiest and most important month of the year for majority of retail outlets. Starting to plan early this year is the best way to ensure increased sales.

This is a reminder to all merchants out there; it is never too early to start securing cash flow to cover business costs over the holiday season! And a Merchant Cash Advance is a new and great place to start.

Today's Blog by Jeff Mitelman

I have recently met with the owner of a competitor to AdvanceIt & got into the discussion about what the size of the Canadian market for merchant funding was. While the industry is in its infancy and no formal statistics exist as to what the true size of the market is I am going to take a stab at answering this question:

Rational 1:        10% of the US market

In December of 2007, a Merchant Cash Advance blog, written by the owner of an established US provider estimates the size of the US market for Merchant Funding to be approximately $850M /year. I couldn’t find any hard facts on the size of the market in the US so for discussion purposes I am going to assume this source to be an expert in the field and the statistic to be fairly accurate.

Based on GDP & population statistics Canada is roughly 10% of the US. Deductive reasoning then states that the size of the market in Canada is approximately $85M.

Instinctively, I disagree with this figure and feel that it under represents the size of the opportunity in Canada. The most significant difference between the Canadian & US lenders is the relative size and strength of the banks. In the US thousands of banks compete for business loans. In Canada 6 banks dominate the supply of funds and act in a manner that is more often considered collusion than competition. The pressure to give businesses more favorable rates or adjust their underwriting criteria to accept a broader merchant base is simply not as strong as it is south of the border. Canadian banks approach to lending is far more conservative than those of its US counterparts.

I would argue that the market size for Merchant Funding in Canada can largely be derived as a product of the loan amounts banks are declining.

According to Interac.org there are approximately 300,000 small businesses in Canada accepting debit cards. Our internal research shows that roughly 10-15% of those have unsuccessfully applied for traditional financing or are simply not eligible. Assuming conservative rates of penetration (15-20%) and an average deal size of $20,000 we believe that the market for Merchant Cash Advance in Canada for the coming year is somewhere between $120 - $150M.

I welcome your comments.

More News from Nowhere is the title of a Nick Cave and the Bad Seeds song, I thought it apropos of this entry.

A few things caught my eye reading the papers this morning (can we still call them papers if I read them on-line?):

-          I think we should all take underwriting tips from these guys. As Slate calls him, America’s Smartest Banker. Amidst all the crises here is a bank right under Wall Street’s nose that had a default rate of below 0.5%. Hudson City Bancorp just focus on their business, taking deposits.  Issuing and holding on to its customers’ mortgages. This got me thinking we see many resellers that try and provide both merchant cash advances as well as credit card processing. Much like Hudson City, the ones we see as best in field focus on one or the other.

-        

-          I liken the housing crisis in the U.S to the reverse of a merchant cash advance. The housing crisis is due in part (but not totally) to changes in the fixed monthly payments of mortgage holders. When I explain merchant cash advances I often use the example of a business that needs to pay their rent, wouldn’t it be great if the mortgage payment in February was different than July? In effect this is what happened here; home owners had their payment switched on them. Merchant Cash Advances do not switch rates and they adjust to the seasonality of your business.

-          Don’t forget, it is not too late to apply for merchant funding to kick-start your business’ back –to-school seasons.  Merchant Funding can be used to purchase inventory, market or any other needs your business might have in building up towards the fall.

Three people emailed me the link to the New York Times Article this morning by 9:00 about banks cutting bank loans and financing to businesses in the U.S. The article discusses how banks are worried due to their recent losses due to the mortgage and credit crises and have now even cut back traditional lending to strong and growing businesses.

In other words, traditional financial institutions, conservative in the best of times, are now tightening their belts even more. Cutting back financing to industries and businesses that are in need of funds to grow is not going to help the economy, except for possibly, bank managers who have compensation tied to bad debt rates and potentially bank shareholders. The point here is that businesses, especially small and medium sized businesses that have traditionally relied on bank financing to help them fund a project, grow, renovate, expand increase productivity, land new accounts…have to look elsewhere for sources of funding moving forward.

Merchant Cash Advances have traditionally played the role, and have been positioned as providing funds to businesses that banks viewed as riskier than their traditional lending profile. As banks constrain their willingness to fund, merchant cash advances become a viable form of financing for a larger number of businesses.

A Note From Lauren

One of my favourite questions to ask when offering merchants cash advances is always about the seasonality of businesses. By knowing this information I can learn how to price the merchant and tailor the business financing program to their needs at that specific time in their business cycle. I am always surprised when a merchant tells me their business is not seasonal. Obviously businesses such as gas stations and convenience stores stay pretty consistent but majority of the businesses I speak with have their high and low seasons.

Like Peter has mentioned previously in this merchant cash advance blog, it is because of these peaks and valleys in Canadian Seasonal businesses that it is so important to have Merchant Funding as a Canadian business loan alternative. I personally believe that having a repayment as a percent of a business’ sales is the primary benefit of having a Merchant Cash Advance. How can it not be beneficial to pay back less on your slower months and more when your business is peaking and cash flow is not a problem. This type of repayment cannot be found with any other form of Canadian business financing. If your business is seasonal and you need financing for your business then a Merchant Cash Advance is your best alternative.

I was watching Charlie Rose the other night and he was having a conversation about the mortgage and credit crisis in the U.S. They mentioned that prior to the recent “meltdown” (I’m trying to act like a “talking head” here), 40% of the GDP in the U.S was due to the housing sector. I was unaware that such a disproportionate amount was due to housing and when we include financial services on top of that it is easy to see why the crises in these 2 sectors plays havoc with the whole economy.

What does this have to do with Merchant funding Goes Back to School you ask?

Well, I wondered how much of the Canadian economy is supported by Going Back to School. Think of all the advertising and promotions that we are bombarded with starting shortly. Businesses such as children’s clothing stores, shoe stores, stationary and school supplies, office furniture, groceries, and book stores all get substantial lifts during this time of the year. There are many small and medium size independent Canadian merchants that fit into this group of businesses.

Merchant Cash Advances are a great source of financing Back to School promotions or the increase in sales due to this time of year for any business. These businesses can use the merchant funding by selling future credit and debit card sales that they will receive in September/October. This money can be used to pay for more inventory, sales, marketing and promotions, equipment or renovations in anticipation of the sales bump due to Back to School. Businesses that might not otherwise be able to get a traditional loan in time (or have the eligibility for) can qualify for merchant funding and put the cash to Back to School use immediately.

A Note From Lauren

If you have ever been on the phone with a merchant, this is a comment you have heard more than once. “This is too expensive!” Merchant Cash Advances are by no means “cheap money” and no one in the industry should ever deny that. Merchant Cash Advance companies are funding high risk businesses with no collateral so obviously the money is going to have a higher cost than a traditional bank loan. That being said, the real question is – Is the extra cost of the money worth it for your business? Majority of the time the answer will be yes if the money received is used properly.

When a merchant is taking this Canadian business loan alternative, they should be using the money towards growing the business and increasing their sales. For example:

Purchase new equipment   -------- Get more clients ---------- Increase profit

Purchase more inventory -------- Sell more Merchandise   ---------- Increase profit

Start a new advertising campaign -------- increase sales -------- Increase profit

Open a new location -------- additional revenues -------- Increase overall profit

So the answer is NO, Merchant Cash Advances are expensive but if used properly you can keep your business afloat during slow seasons and take your business to the next level of growth and profit. Therefore, they are worth every penny!

I have written before in this space about merchant cash advances for airlines. The idea being that an airline receives almost all its revenue from passengers via credit cards if there was a funding agent large enough and able to take on the risk, one could fund the airline and be paid back by taking a percentage of future debit and credit card sales. I was thinking of this when reading an article on troubling times in the tourism and airline industries in Sunday’s New York Times. The tourism and hospitality industries rely on merchant cash advances as sources of funding and as an alternative to loans in order to help them market and grow. This article discusses a creative way to deal with decreases in airline seat capacity by having partnerships among different sectors within the hospitality industry. From a merchant cash advance standpoint, here is another way to make use of funds, through creative marketing partnerships and programs. We have seen merchants in the same mall, block or town partner together to use merchant funding to create co-branded direct mailers, advertising and marketing programs.

Canafunding, a lock box solution for merchant cash advances, and Amerimerchant’s CEO recently did an update to his 2008 Predictions for the Merchant Cash Advance industry in 2008 and they are looking pretty prescient, nice work!

TODAY'S BLOG BY JEFF MITELMAN

Merchant Cash Advances in Canada is beginning to gain traction. Everyday we speak with new merchants who now understand what Merchant Funding is and are considering it as a vehicle for developing their businesses.

There are many factors to consider when choosing a Cash Advance provider. Today’s topic will deal with methods of repayment.

In Canada all of the providers we are aware of offer a “Lock Box” solution for repayment. A Lock Box is a form of escrow account where a merchant instructs their current payment processor to direct their daily batch deposits to a bank account owned by the Cash Advance provider and held for the Merchant “In Trust”. Once the funds enter the account, the Cash Advance provider then ‘sweeps the account’ or withdraws their daily portion of the funds. The remaining funds are then forwarded to the Merchant’s commercial account (typically at another bank).

Our methodology is somewhat different. We prefer direct debit. In this scenario, upon funding, the Merchant’s payment processor provides AdvanceIt with daily debit & credit card sales totals. The Merchant’s own bank account is credited from their payment processor at the same time as it is debited from AdvanceIt creating a net available balance.

The advantages to Direct Debit are significant:

• No delayed settlement. The Canadian EFT system has a built-in delay of 2-3 business days. A Lock Box can delay deposits for up to 1 week.
• No cash flow pinch
• No Escrow account owned by an unknown
• No 2^nd set of bank fees
• No change fees from the payment processor
• No fees to change everything back when the advance has been repaid
  

For more information contact info@advanceit.com

A NOTE FROM LAUREN

I was out for dinner last night with my family and I was being bombarded with questions about my job and what Advanceit does. The main question that keeps re-occurring from my family, merchants and the resellers that I train is: Why would someone take a merchant cash advance and not just go to the bank?

There are two main answers to that question. The first is; majority of Canadian small and medium sized businesses can’t get a Canadian business loan from the bank, even with good credit. The banks in Canada are extremely risk averse and don’t provide business financing to many industries, for example restaurants, pet stores, and auto related businesses . As well, many of our merchants have invested so much of their own personal money into their business that their personal credit has suffered as a result and they can’t get money from other sources.

My second answer is that we have many businesses that could get money from the bank but have chosen to take a merchant cash advance for the speed, flexibility, and no collateral necessary.

Getting money from a bank can take months as well as the application process is long and there are fees associated with it. For example, if a merchant finds a great deal on inventory for their store and needs extra financing to purchase it, they can not afford to wait for the banks so they will take a merchant cash advance and receive their merchant funding within 72 hours. The business owners then factor the cost of the advance into their cost of goods sold. Other obvious reasons why a merchant would choose alternative funding over a bank loan would be no collateral as well as not having the Canadian business financing show up as a credit line on the credit report.