Within the last two years, investing in the Merchant Cash Advance space has become quite an enticing venture due to the potential rate of return on investment, yet far too many people are enamored by the lore of funding houses raking in the cash. Outsiders assume these institutions know exactly what they’re doing and how to appropriately manage their capital. However, over the last few years many funders with private funds and millions of dollars to dispense at will have gone out of business for two main reasons: Improper underwriting and inadequate collections—The focus of this article being the collections process. In this industry, it isn’t what you put out– It’s what you get back.
CEOs of funding houses love to swing by brokerage firms supplying sushi lunches for the staff, or turning up the charm and courting potential investors. They offer the opportunity of syndication investment in their company in exchange for a substantial upfront contribution and wait with baited breath, hoping you reach for your checkbook. Yet, in the moment, virtually no one asks them the most crucial question of all: “What is your plan of action from the moment the first payment is missed and a client defaults? What will you do to ensure our funds are recouped?”
More often than not, funders asking for a check and promising lucrative returns have absolutely nothing in place that resembles a cohesive plan of action and are unable to explain the back end of their collections apparatus. Occasionally, they do not even have an actual collections process in place at all.
This is quite disturbing for obvious reasons. How can one claim to run a professional organization, extend their hand, and ask for an investment while simultaneously lacking the most basic component of any financial institution that lends money—or, in the case of MCA– purchases future receivables? How are they willing to not only dispense their funds, but yours as well, without a clear strategy ready to implement in the event of a default?
Those interested in investing in the Merchant Cash Advance industry must table their enthusiasm and start focusing on the legalities of collections. Resist the seduction of ROI and get serious about understanding the back end of the industry. Whether Wells Fargo is issuing a line of credit, a Fintech company is using automated underwriting technology, or a MCA funder is purchasing future receivables, there is one nagging detail that is omnipresent for all financial lenders: A borrower’s intent is impossible to determine, so it is essential to ensure your investment is in the right hands.