By now, we all know the story. In 2008, the subprime mortgage crisis triggered a financial collapse in the United States and around the world. We also know that the United States government bailed out most of the major domestic banks.
What’s known to some, but certainly not all, is that since then the banks have done very little lending to small business America. In other words, after “the people” bailed out the banks on Wall Street, these banks reciprocated by bailing on Main Street.
There are many theories as to why. Here’s a look at the most commonly given explanations:
- Commercial lending is no longer profitable due to excessive customer defaults.
- Banks are having a tougher time meeting new capital requirements.
- Underwriting standards have improved significantly.
- Uncertainty over government regulations and standards.
Whether it’s for one of these reasons or all of them, in the end, isn’t really important. The reality is the banks aren’t lending. The situation becomes more severe when you consider that the four largest banks, Bank of America / J.P. Morgan Chase / Citigroup / Wells Fargo, account for approximately two-thirds of all commercial lending. If commercial lending isn’t profitable for them, it’s unlikely to be so for smaller banks.
So, who’s going to pick up the slack? Who’s going to accept both the risks and rewards of commercial lending at this time? Who’s going to bet on small business America? It’s the merchant cash advance industry.
A merchant cash advance consists of a lender purchasing future credit card sales from merchants at a discount. It isn’t a loan and it isn’t cheap. But it is a way for businesses to get needed capital. If anyone finds the industry offensive or predatory somehow, they should direct their contempt towards the banks who aren’t lending.
Merchant cash advance providers take on huge risk. If a merchant goes out of business, the lender has no collateral to fall back on. It’s an insecure form of lending.
The forecast for the next 5-7 years does not include a return to lending for commercial banks. Their assets have depreciated dramatically and are not going to recover anytime soon. Their capital requirements and underwriting standards are now more rigorous.
In their stead, merchant cash advance, a form of “shadow lending”, is going to be with us for many years. Therefore, it’s critical for the business owner in need to get the best merchant cash advance deal that they possibly can. With so many lenders in an unregulated environment, there are dramatically varying rates and expected timeframes for payback. One must be very careful and choose the right people to work with.
Merchant cash advance is far from perfect, but for many business owners on Main Street, it’s their only option. It is what it is. Once a merchant takes on a merchant cash advance, the hope is that the business can prosper and manage cash flow until the time when banks might offer more credit again?