The Threat of Regulation

The merchant cash advance industry continues to evolve into a rapidly growing industry since the product was originally introduced almost twenty years ago. Today, there are estimated to be over twenty merchant cash advance providers although the “big six” dominate the industry. There are also dozens and dozens agents, card processors and sales people offering the merchant cash advance product through various cash advance providers.

As more and more people are selling this product, capital is becoming a more reliable and available funding source to businesses nationwide that may not have access to traditional lending sources. Because a merchant cash advance is typically not a loan, (it’s a sale of future credit card receivables) it allows funding companies an alternative underwriting method to provide working capital to merchants that would not qualify for financing with traditional underwriting formulas.

It is estimated in 2007 alone that $600 million – $700 million worth of merchant cash advances will be provided to help grow tens of thousands of businesses nationwide. With that said, the marketplace has become extremely competitive.

Whenever an industry experiences rapid growth, there are some almost predictable consequences.

1 – Some merchants will be abused by “bad brokers”

2 – Capital will become more competitively priced

3 – The industry will become regulated or will self regulate

Regulation is by far the largest threat. Not to the funding companies, but to the merchants and those business owners needing capital quickly and effectively. If the industry grows too large or if there are significant complaints, the temptation to regulate will likely become too great and I suspect the end result will restrict how this industry can serve the needs of its clients.

It will be interesting to see how this develops over the next two to three years. In the short term, however, merchants today can serve themselves best by using one of the reputable funding companies and working with an independent, professional broker who will help them through the growing and complex network of companies to find the capital that fits them best.

The card advance industry is serving an important niche in American small business and I hope it can survive in its current form.