I recently had a discussion with a merchant small business owner who had come to us looking for a merchant cash advance (MCA). Our underwriting department had reviewed her bank statements and discovered a daily Automated Clearing House (ACH) debit from the business’ bank account, and the deduction was by another MCA company. I explained to her our concern with funding with another cash advance already in place. She was under the impression that the daily ACH was a “business loan” and not a merchant cash advance. I explained that the product she was sold as a business loan was, in reality, a merchant cash advance.
Our conversation made me realize that aggressive MCA companies have no regard for the survival of their customers’ businesses and mislead many businesses. Quikstone Capital Solutions believes it is important to explain the details of a merchant cash advance and the consequences of over funding. This is what we consider when underwriting contracts.
What is a merchant cash advance? A merchant cash advance is capital provided to a merchant in exchange for payment in the form of a percentage of their future sales. The Quikstone Capital Solutions model calls for a front-end deduction from the merchant’s credit card processing.
Some MCA companies make a daily or weekly deduction from a merchant’s bank account via ACH. The daily ACH approach was originally referred to as simply the “ACH product” but it is often marketed as a “business loan” because of the fixed payment feature. Merchants should make no mistake; both products are underwritten in the same way and priced the same way.
The primary driving factor in determining a merchant’s potential eligibility for a cash advance is a review of the merchant’s cash flow. In a Quikstone Capital Solutions MCA, it’s important that we leave merchants with enough cash flow after our repayment deduction. When evaluating a merchant’s eligibility, we prefer to see a 40 percent profit margin. In other words, after paying employees, suppliers and fixed expenses, revenue from cash and credit cards needs to exceed expenses by 40 percent. This ensures that the merchant is left with at least 20 percent of its profits after Quikstone Capital Solutions’s repayment deduction. Other MCA companies require a fixed, often sizable, daily deduction from a merchant’s bank account leaving little to no cash flow after expenses.
So, why would an MCA company make a secondary advance to a merchant and clearly put the merchant at risk of going out of business? Many cash advance companies that make secondary advances and call them “business loans” receive their capital from hedge funds, and hedge funds will stop capitalizing a company if it doesn’t spend money. An MCA company that makes secondary advances may have a portfolio of “business loans” that look good on paper but will drive merchants to the verge of bankruptcy by allowing them to get in over their head.
This short-term strategy only works for the funding company, and can be profitable considering they will be long gone before the hedge funds realize what is happening. Losses can be concealed for quite some time and even hedge funds may not care about the losses because they are passed along to investors. Hedge funds make money on the fees and costs they charge their investors. You can see with this model there is little incentive to keep the merchant’s best interests in mind.
Another factor driving irresponsible merchant cash advances are brokers. This is not to say that Quikstone Capital Solutions doesn’t have relationships with outside sale agents. But, if a deal isn’t right for our merchants we don’t fund.
Many funding companies who sell the “business loan” product will over fund a merchant because maintaining the broker relationship and paying that broker’s commission is more important than seeing a merchant survive. Quikstone Capital Solutions values our relationships with outside sales organizations but not at the expense of our merchants’ viability.
Quikstone Capital Solutions has been in business for ten years now and we’re in it for the long haul. We partner with our merchants to achieve success and their success is a direct reflection on us. Quikstone Capital Solutions will never put a merchant in a position to fail under the weight of its own debt.
Our product is designed for projects that help a merchant’s business grow and increase sales.
Going back to the conversation I had with the business owner who had multiple advances; when I asked her how she was surviving, she said it was a struggle. She was constantly overdrawn at the bank because the daily ACH is the same amount whether she’s closed or open, the weather is good or bad, or it’s a slow day or a busy day. Quikstone Capital Solutions’s repayment term is flexible and deducts a percentage of daily sales volume. So the payments fluctuate with the business. She simply didn’t understand what she was getting into and deeply regretted her decision. She was sick over the possibility of losing her business because of the daily ACH deduction from her bank account.
This business owner isn’t alone. I hear stories like this every day. My advice is to be careful of a broker or merchant cash advance company that wants to provide you with too much capital. Over funding can kill your business.
