Big players are entering the merchant cash advance business and the industry's smaller players are maturing. Meanwhile, the market is growing with the help of automated clearinghouse transactions.
The industry has caught the attention of high rollers who are transforming merchant cash advance into a mainstream option for funding small to midsize businesses.
In just the past two years, venture capitalists and hedge funds have invested tens of millions of dollars in long-standing merchant cash advance firms and startups alike.
Meanwhile, big players such as PayPal and the card brands have launched their own programs to provide working capital to merchants.
"The business has changed so much in the five years we've been in it, it's almost not the same business anymore," says Isaac Stern, managing partner of Yellowstone Capital LLC, a hybrid ISO and merchant cash advance company based in New York.
David Rubin, CEO of Capital Stack LLC, a merchant cash advance company in New York, has been monitoring the industry's growth on his DailyFunder blog. He estimates that a year ago, there were about 50 merchant cash advance funders and about $1.5 billion in funding. This year, that number is north of 120, and the funding volume has doubled to $3 billion.
Counting mainstream funders such as Amazon and PayPal, which offer products that follow the cash advance model, the numbers are closer to $5 billion, Rubin says.
Until now, ISOs were using cash advances as an acquiring tool for credit card accounts, Rubin says. He estimates that of the 20 million to 25 million businesses in the U.S., about 5 million accept credit cards. When ACH opened up the remainder of those businesses for loans, "the funding volume went off the charts," he says.
"I would say now it's going to grow 50-fold in a 10-year period, just because now there are so many more businesses that are approvable," Rubin says.
Stern and other insiders say the popularity of cash advance is good news for ISOs, who might have an easier time pitching the product to merchants because they already know about it and know to ask for it.
Stern used to have to describe his company to people as "short-term financing," because few people really understood what he did. Today, he just says he's in merchant cash advance.
A number of factors have coincided to make merchant cash advances more attractive.
Previously, cash advances were associated with luring merchants into a high-rate source of cash. Funders could charge any rates they wanted because the industry was so unregulated. "It was really a bunch of cowboys," says Andrew Reiser, CEO of Strategic Funding Source, a New York-based provider of alternative financing.
But as the industry has matured, the more disciplined companies have survived, while the others have fallen by the wayside, Reiser says. And with the recession causing fewer banks to offer traditional loans, the market is wide open for alternative funders of all shapes and sizes to enter the fray.
The industry has also outgrown the one-size-fits-all pricing that once defined it. Before, all lenders set high prices. Now, companies rely on risk-based pricing, which means better clients get better deals, and ISOs can offer more competitive pricing. "That changed the dynamics of the industry," Reiser says.
But the real change in merchant cash advance, members of the industry say, has been the widespread use of automated clearinghouse payment transfers. It used to be that merchant cash advance was available only to companies that accepted credit cards. Now with more businesses accepting payments online via ACH, there is another mechanism for collecting from merchants.
"It took some time for people to accept people going into their bank account and debiting their account," Reiser says. "Five or six years ago, no one would have allowed someone to do something like that."
Stern can remember one of the first conversations he had with a merchant when he got into the businessmostly because it ended with a "no."
The merchant ran a successful operation, pulling down $1 million a month in sales, and he was looking for funding sources. The catch: The business was cash only. As a result, Stern had to pass up the deal because he couldn't offer the merchant a cash advance.
"He was making huge money, great margins, but he didn't take credit cards. And it was so frustrating for him," he says.
Stern doesn't have to turn away that kind of company anymore. "Today, everybody's fundable, as long as you have a bank account," says Stern.
Gone are the days when ISOs had to walk away from potentially big deals because the merchant didn't accept credit cards, or didn't have enough processing volume. ISOs and merchants now have more flexibility to walk into just about any business and offer financing. "That's why it's mainstream," Reiser says.
An expanded version of this article is scheduled to appear in the November-December print edition of ISO&Agent.