As the alt-fi industry grows in prominence, large industry-wide milestones are reported as signs of the sector’s growing acceptance in the financial mainstream.
As important as such macro barometers are, they are borne by the achievements of dozens of individual companies working to meet the financing needs of SMEs.
One such company celebrating a significant milestone is Merchant Cash and Capital (MCC). The business-financing platform, celebrating its 10th year in operation, topped the $1 billion total funding mark earlier this year.
MCC Founder Stephen Sheinbaum, in discussing their success, says the $1 billion level reflects a wide acceptance of MCC’s products, which include merchant account revenue cash advances along with receivables factoring.
Those products became more popular in the wake of the recession as increased government regulation of traditional banks and those banks’ ebbing interest in lending to SMEs left many small business owners unsure of where to turn. In surveying their own clients, MCC discovered 57 percent of them had applied for a loan in the past, with 75 percent describing the process as difficult or extremely difficult. Eighty percent of applicants were either denied or withdrew from the process.
Enter options like MCC, who are able to deliver financing to small businesses in formats that make sense for both borrower and lender in a much shorter time frame than traditional institutions are able to deliver.
For companies like MCC, the platform’s the key, as it simplifies and shortens the process while saving the company much of the bricks and mortar cost banks contend with. With the alternative lending industry still in its infancy, application programming interface (API) development is just beginning to tap into the wide range of data available to help these companies make prudent decisions.
“We are in the first or second inning of a nine-inning game in terms of API development and improving efficiency,” Mr. Sheinbaum explained.
Mr. Sheinbaum said the goals of API development and of obtaining data from third parties. The most sophisticated try to make to make their user interface as easy as possible by limiting the information they have to get without eroding underwriting.
Instead of asking a merchant for bank statements, MCC partners with trusted third parties which ask the merchant to submit a username and password. The intermediary pulls the bank statements and forwards them to MCC.
The same process works for merchant tax returns as long as they use QuickBooks, Xero, and other popular software, Mr. Sheinbaum said. MCC also gets instant information from credit agencies.
The absence of hard documents minimizes the potential for fraud, he added.
Once the information is received it is immediately entered into a scoring system, with the applicant assigned a score between 200 and 225.
MCC is headed toward an IPO, and the $1 billion figure was one milestone they wanted to reach before entering into that process. Another is to introduce a securitization, Mr. Sheinbaum said. He estimates MCC is between six and 12 months away from offering one. He cited Kabbage, OnDeck and CAN Capital as three examples of platforms introducing a securitization.
Of course, Mr. Sheinbaum is watching the Lending Club and OnDeck IPOs and their aftermaths.
“We watched them closely and continue to do,” Mr. Sheinbaum said. “It is great to see how well received and validated the business model is.”
With revenue-based funding, MCC advances a company money and buys a percentage of future revenue. In some states, a borrower makes fixed payments while in others it is based on revenue and what program the borrower is in.
“It differs from a traditional bank that focuses on EBITDA or net income,” Mr. Sheinbaum said. “Obviously we focus on those. We are just in it for a shorter period of time.”
Mr. Sheinbaum said a key aspect is trying to understand the unique cash flow and revenues different businesses can have.He used the example of a business in Southeast Florida that is susceptible to the ebb and flow of the tourist season. Such businesses will see a positive cash flow between October and May, but their June-September period will be weaker.
Such a company will be attracted to variable programs where payments are based on cash flow so the borrower can pay more when more revenue is coming in.
MCC has been operating for a few years before the recession hit, and Mr. Sheinbaum said when they saw a significant downturn coming, MCC prepared by looking at individual parts of the economy to see which ones had the potential to withstand the turbulence and which ones were likely to suffer.
“In 2008, when we started to see the real estate market fracturing we changed our underwriting criteria in terms of the businesses we would focus on,” Mr. Sheinbaum recalled. “We moved away from the housing sector because we saw that being adversely impacted.”
MCC reduced the number of businesses they served in the housing sector and tightened credit standards for such peripheral industries as construction, furniture, carpeting, appliances and lighting.
They also looked closely at different regions of the country to identify once-booming areas that were now in a freefall because they knew consumer spending would drop.
Recent history provides other timely examples that MCC had to watch for, Mr. Sheinbaum said. In 2008, oil hit $142 per barrel, meaning people had less discretionary income to spend on jewelry, art, and high-end retail. Instead of going to expensive restaurants, many people went to family chains. Many businesses had less revenue, so associated industries that would sell to those businesses suffered.
Then as the economy improves, revenue goes from surviving to growth-oriented initiatives like hiring, renovations, new product lines, and additional locations. Mr. Sheinbaum has been seeing more of that in the last 12 to 18 months.
He’s not sweating interest rate hikes, whenever they actually occur, as long as they are within a few hundred basis points.
“Rate hikes happen when economies and spending are strong so that’s a positive,” Mr. Sheinbaum explained. “If our cost of money is going up and businesses are improving then hopefully we’ll have fewer troubled accounts and it should balance out.”
In discussing advantages alternative lenders enjoy over traditional institutions one of the areas that inevitably comes up is the tighter regulatory environment banks operate in. Whatever legislation gets enacted, Mr. Sheinbaum welcomes it as it tends to weed out unsavory players, making it healthy for the overall industry.
It will also take a while for legislators to get to B2B matters, as they are focused on the consumer at the moment, Mr. Sheinbaum said.
Businesses considering applying for financing can take a number of steps to increase the chances of a positive response and to make sure the process runs more smoothly, Mr. Sheinbaum said.
“Do as much preparation as possible,” he advised. “Know your business inside and out.”
“Recognioze the problem you’re facing and have a viable solution to solve it. Explain how the capital will solve that problem.”
Have a firm grasp of your numbers, especially if you are in growth mode, Mr. Sheinbaum explained. Be prepared to describe how your company has progressed to the point where you wish to expand.
“It’s difficult for a financial institution to want to give someone money if they have not done homework and are not prepared to talk about gross revenue, profit margins and net income,” Mr. Sheinbaum added.
One thing everyone in the industry agrees on is the importance of public education. Many business owners think their only option is the local bank or credit union. For someone celebrating the $1 billion mark, how big is the potential market once everyone knows about alternative lending sources?
“This is still a blue ocean opportunity,” Mr. Sheinbaum said. “The number of merchants who have already received financing from alternative finance companies is probably in the low to mid single digits of those who are eligible.”
“As companies continue to go public and access less expensive capital, and more institutions come in and offer cheaper forms of financing, companies like ours will continue to enhance products and create new products where the cost to the end user is lower.”
Merchant Cash and Capital also partners with companies to offer financing to their customers, Mr. Sheinbaum said. Over time much of MCC’s business comes from third parties who want to use capital to help problem solve for their customer base, he added, citing the example of people running online accounting platforms wanting to make sure their customers have access to capital when they need it.
The ease of the technology is such that software companies can make sure their clients can properly identify any potential cash flow issues long before they cause trouble or so they can properly fund their growth strategy well in advance, Mr. Sheinbaum said.
“Through the API they can send us data and receive offers almost instantaneously.”
MCC announces Bizfi portal
The next step up from an effective platform is aggregation, where a small business owner can peruse financing options available from several companies at once, much like travelers do with hotels.
MCC now offers that aggregation with Bizfi, a connected online marketplace bringing together financial institutions offering a range of products including SBA loans, equipment financing, accounts receivable factoring, and purchase order financing.
Mr. Sheinbaum said Bizfi is fully integrated online with nine partners and hopes to get another six automated within the next two months. Another two-dozen partners work with Bizfi offline.
Business owners will find MCC’s applictaion process much simpler than applying at a bank, Mr. Sheinbaum said.
“The merchant populates eight or nine fields and gets firm offers back instantly.”
Bizfi also provides funding concierges to help applicants navigate the process. Borrowers can also check their loan status and payment terms online at any time.