Growing Demand for Merchant Cash Advances, But Lenders Tighten Underwriting

A recent report released by The Green Sheet on Tuesday, revealed that while there is growing demand for the merchant cash advance product, the actual number of merchants receiving cash advances has decreased over the last few years. There are several reasons attributed to the growing demands:

1) Merchants in these tough economic times have resorted to merchant funding to try to pay off debt.
2) Banks have cut credit lines, even to some of their long standing customers leaving merchants to look for other means of finance.
3) Merchants who have made it through this economic recession are looking to restructure their businesses, restock dwindled inventory, and renovate old equipment and locations.
Due to several factors, private lenders have tightened up their credit lines as they have incurred increasingly bad debt over the past two years. Just five years ago, many merchants who would not qualify today for a merchant cash advance were being approved. Merchants who had unpaid tax liens, open bankruptcies, sub-500 credit, horrific cash flow issues, and who were months behind on mortgage or rent payments, were receiving large amounts of money at high holdback percentages. These merchants could not withstand the additional burden on their cash flow and many defaulted. In addition, because the industry was so new, some even managed to defraud investors by deceiving them with false bank and credit card processing statements.
Today, lenders have more experience in the underwriting process and are more selective about their merchants. Not only are they more selective about their merchants but they are also taking the merchants’ “best interests” into account. Because merchant cash advances are unsecured loans, the lenders lose their investments when merchants go out of business. Heretofore merchants received large amounts of money at high holdback percentages. Today, lenders advance more modest amounts of capital at more reasonable holdback percentages that are proportionate to the merchant’s business financial model.
If there is one good thing that we can say about this recession and its effects on the merchant cash advance industry, it is that it has created a more educated and cautious lender who realizes that it is in his best interest to care about the best interest of the merchants.

To see the original Green Sheet article click here!