Why MCA Companies Fail

Tolstoy famously said “All happy families are alike; each unhappy family is unhappy in its own way.” Similarly all successful MCA companies are alike but failed ones are failed in their own way. MCA requires understanding the limitations of cash flow forecasting for small business and not driving beyond what can be seen beyond your windshield. Risk based pricing for perceived error rates only compensates to the extent that you can set boundaries around what you are sure you are uncertain about. What has become apparent is that despite scoring models a number of companies have overestimated how volatile cash flows of small business may be and the difficulty in forecasting out more than the the traditional 12 month MCA horizon. Risk in small business finance is not linear and does not track industry or time in business uniformly no matter the duration.

A contributing factor has been the high cost of acquisition and the use of lifetime value of customer projections requiring renewals for profitability. When returns are negative for twelve month plus term first time origination a downturn in credit performance is doubly damaging. Broker compensation schemes that provide less compensation for renewals also contribute to stress on renewal rates as brokers move clients to where their compensation is highest.

Does this mean that MCA is just a bubble or that scoring is a sham? I believe that it just means that we are early in the second inning of a longer game that is irrevocably changing how small businesses access capital.

David Kirk

Collaborative Leader successful in optimizing the national reputation and culture of service based entities, meeting/exceeding internal growth revenue and development targets.

6y

The more we can do to encourage a growing, improving environment in our businesses, the greater the change will be in the marketplace. Do we empower internal sales by making up-selling current clients an easy process? Or do we stifle that with a clunky sales process to add features? Do we give our clients reasons to continue to buy from us by giving them value every day, not just when they launch? Whether we are brokers or funders, or processors, how are we doing internally?

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Patrick Izzo

Fintech Founder & Strategist | Credit Risk, Credit Operations

6y

MCA has 4 cost centers: opex, net defaults, cost of capital, CACs. If you want to succeed in the space today you need to market perform on 3 of those 4 and excel at at least 1 in comparison to the competition.

Carol Franz

Director of Sales at Quaker Capital Inc. License Mortgage Broker

6y

As a long time in house sales person I can't agree more.

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Michael Sichenzia

President at All-Ports Capital

6y

The basic premise of MCA funding is a good one. It fills a void for many and at times that can make all the difference in the world to any small business. There are several problems though that put this industry in the cross hairs of the heavy hand of regulation, and the winds are definitely changing in that direction. First, is that the "compensation schemes" you speak of, can and often do, lead to myriad perversions downline where we see a systematic "churning" of clients just for the sake making a new deal and earning a "new" higher fee. No consideration is given to the "why" and it's all about the "how." That's a problem! One only has to look at the mortgage industry in 2005 -2006 and draw the comparison; it's as clear as day. Secondly, the industry as a whole needs to be more proactive in the areas of voluntarily restructuring those clients with legitimate hardship needs. The current mindset of collection activities is at times draconian and paints every client with a very broad brush, which has increased the cost of collections without resulting in any real concomitant higher overall collection rates. In fact, the losses are growing! These portfolios when "marked to market" are significantly distressed. Simply look at the CAN Capital debacle for perspective on this point. By being proactive in both of these areas that I've mentioned, through the internal process of "scrubbing" the portfolio, the industry can effectively resuscitate defaulting scenarios which in turn results in higher overall collectibility. While at the same time these steps will restore the industry's image in the court of public opinion with the clients it serves, which in turn will lead to increased future business; and most importantly, possibly help to head off the impending tsunami of regulation about to come ashore. As recent history has shown us, financial firms that do not pay attention to the clear warning signs, all but face extinction, whether it comes as a result of a systemic market correction or overzealous government fines and regulations. Firms that simply ignore these realities and choose to turn a blind eye instead ...do so not only at their peril but for the rest of the industry as a whole as well.

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Good point, Sol. When you’re funding merchants whose loans are NOT collateralized by assets, you do not want to go out more than 12 months. If we were going out for more than 12 months, we’d be in hard money loans backed by real estate. I have many A and B paper which I’ve renewed more than 3 times, however; somehow many of them end up short of cash flow. The economic conditions and the longevity of business landscape are temporary. Luckily, we’ve identified the ideal credit box formula to capitalize on MCA’s. Alexander Mikhaylov, CEO at Gold Star Advance

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