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Merchant Cash Advance – Podcast Transcript

CM Hello, everyone, and welcome back. I am Charles Musgrove, your host of Answers that Count and we’ve got a great show for you today. We’re going to talk about MCA merchant cash advance. So we’ve got one of the industry’s leading experts on the show today, Mark Mellman. But before we get started, remember to like the video, subscribe to the video and hit the notification button so that you’ll be notified when we drop future shows. So thank you for joining us today. You know what we try to do. We try to bring knowledge that will help you run your business, help you do it better. And let’s talk about MCA merchant cash advance. So, Mark Mellman, tell me about yourself. Just a brief history and the company that you own and operate right now.

MM Well, thanks, Charles, it’s good to be back with you. My company is called MCA Stacking Solutions. And what MCA Stacking Solutions does is it works on a consulting basis with small to medium sized companies that have taken on MCA debt, that is merchant cash, advance loans. And while they borrowed the money and it all sounded good today, they borrowed the money. They run into problems with paying it back. And that’s where I come in to help them get out from under. That’s what background is.

CM You know, that’s always the problem, isn’t it ? It’s easy to get money, but a lot of times it’s very difficult to to pay it back. So, Mark, I interrupted you tell me.

MM It’s Always easy to get money.

CM It’s always easy. So give me a little bit on your background and we’ve got some good stuff to jump into.

MM Sure, my first career, I was a trial lawyer in Philadelphia, spent 20 years doing that, and for a good portion of that I represented banks and financial institutions. So I knew lending from the creditor side rather than from the borrower side. I then spent eight years running an energy brokerage company in New York City. We sold the company eight years later to a competitor. And so now that I was grown up, I had to figure out what to do and I decided to become a management consultant. And over the past 16 years, I’ve been consulting in the financial services space, including lenders, factors and their customers. And within the past couple years, factors referred me business for clients who had stacked MCA debt. And that’s how MCI stacking solutions came to be.

CM Good. Well, that’s that’s a good background in that that really speaks to your credibility in this industry, because you’ve got a diverse background and a lot of it on the outside and in more and more of the traditional banking world. And now you’re in the I would say the fringe on the the the banking or the credit world. And, you know, you’re probably going to not like me to say this, but I’ve I refer to the MCA debt before as the if you’re if you’re in the if you need to get that MCA debt, then is probably a like suicide debt. I mean it if you if you’re not careful, it will just spiral out of control. When you say stacking, that’s that’s what you do a lot of times see as they get one and then they’ve got to get more in order to survive.

MM It’s like jumping down a rabbit hole. Once a company takes their first MCA loan, they have a hard time not taking the second or third or fourth. I’ve had clients who at any given time have had eight to 10 separate MCA loans all at once. And you’re down that rabbit hole and you can’t get out on your own. And so that’s where I come in and I try to give you a hand getting out of the hole.

CM Yeah. So let’s do the let’s call it. Let’s call it like it is, because the MCA debt, if you compare the rates and the nature of that MCA debt versus traditional debt that you would get from a bank or somebody that’s in a first lien position, it’s totally different. I mean, the rates are borderline usurious.Is that is that fair to say ?

MM Well, they’re not actually borderline. They’re usurious. Way over the typical state usury rate and usury rates vary from state to state. And there are even some states that have no usury cap. But the typical MCA loan is at interest rates that go anywhere from 75 to 100 percent or much greater than that, and so it’s a difficult path to maneuver if you’re the borrower.

CM Yeah, that’s really crazy. And it is true that typically those MCA, the debt is not in a first position so that they don’t have the first right to the assets that the company worked to go under.

MM That’s correct, the MCA is typically junior to either a lender or a factor, and so they while they may take a collateral position and security interest in the assets of the company, they are junior to senior lenders. Although I do have a client right now who had no other debt and last year went out and took down seven MCA loans and then reached a point where because of his business, he couldn’t repay them.

CM Yeah

MM And the only reason he took MCA debt without getting a factor or lender was because he really wasn’t that savvy enough to know that you could get that kind of lending relationship, and he did the easy thing. He went online, saw the MCA offer, and within twenty four hours he could start taking down money.

CM Yeah, it’s like we said, to start the show, it’s it’s very easy to to take on new debt. And the problem is when you have to pay that back. And I guess one of the ways the MCA debt holder is able to mitigate their risk of failure, of not getting repaid is they require payment much more frequently than what a typical bank or other debt instrument would require. So they may require daily payment or weekly payment.

MM That’s correct. Typical is daily payment Monday through Friday or weekly payment on Friday. And so every day they are automatically debiting their customers account for their payment amount. And the pressure of that continues to build over time. And that is what results in a default by the borrower.

  CM Marc tell us how the how these guys are able to skirt the state laws on usury rates.

  MM The MCA contract historically has been deemed to be a purchase and sale of future receivables rather than a loan.


  MM And because courts in the important states that review these contracts have upheld the illusion, and it is an illusion that these contracts are the purchase and sale of future receivables rather than a loan. The MCA’s have been able to operate, even though in reality it’s a loan at a usurious rate of interest.

CM So are there states that are more favorable to MCA debt versus other states ? I mean, for instance, since Florida is a Florida, a place that you’re going to see a lot of those transactions initiate.

MM Well, actually, no, the majority of all MCA contracts are written under New York law, regardless of where the MCA is headquartered and most importantly, regardless of where the client customer merchant is located.

CM So the company’s making the loans are out of New York because they’re going to my guess is there is going to be favorable laws in place there that allow them to get away with it.

MM The majority of MCAs are headquartered in New York, but even the companies that are headquartered elsewhere still provide in their contracts that New York law will apply. And the reason for that is that historically, up until now, New York courts and New York law have been very supportive of the creditor side of a transaction rather than the borrower’s side of a transaction. And so therefore, these contracts provide for New York law, because if you read New York case law, they have consistently upheld these contracts as purchase and sales rather than loans.

CM Wow. So what’s happening, what’s the current change in that environment that is maybe shifting some of the I guess the favor over to the consumer rather than to the to the contract and to the person issuing the money ? Yes, there have been a couple of things that have happened in the past year and a half that have benefited the merchant side of the transaction. Most importantly, in August of 2019, the state of New York enacted a change in the law that provided that no longer could MCAs confess judgment without notice to its customers who were located outside the state of New York. And that was extremely important because up until then, an MCA upon default by its borrower could, without any prior notice to its borrower, just go into the clerk’s office in any county in New York, file a one page confession of judgment where the borrower has already acknowledged allowing a judgment to be entered against themselves and judgment was entered. The collection process could be in the state, changed the law then. In August of that year, so that now MCAs don’t have the benefit of what is essentially self-help now in the event of default in the traditional sense, and MCA would have to file suit, serve the complaint and then go through litigation with the trial court if they want to achieve a judgment. And so that was extremely important and beneficial to the merchant. The other thing that’s happening is there are cases pending at the present time in the New York federal and state courts, which are actually considering the idea of whether or not this is truly a purchase and sale or it is in fact a loan. And it you know, it looks hopeful.

CM That’s a big deal if they’re looking at that.

MM Huge. It looks hopeful that these cases may come out on the side of the borrower and find that it’s a loan, and if they find that it’s a loan, it would be usurious and therefore it would not be collectible by the MCA.

CM That would be huge. So when you go into when you get a called by one of these borrowers for help, you’re really helping not only the borrower, but you’re helping the the bank or the other entity that is in a first lien position so I would think that you got two people cheering for you to come to really be able to help out that borrower and probably only one going against you and that’s going to be the merchant or the MCA person.

  MM That’s correct, directly, when I work with the borrower to, in the first instance, try to reduce their daily or weekly payments for a period of time, and then in the second phase of my effort to try to resolve the outstanding amount of the debt for less than that which is owed, that certainly helps the borrower. And indirectly, of course, if there is a senior lender or factor in place, it strengthens the credit risk of that senior lender or factor. And so it benefits them as well.

  CM Good. So you’ve got there’s a lot of advantages also just you knowing how this works, how the laws are written and how to help, you know how to help that borrower. So you’re able to go in and and typically negotiate a put a stop on the payments so those daily payments should stop and then to reduce the amount of payment that’s ultimately paid back to the MCA under that MCA contract. Is that right ?

  MM That’s correct. I mean, not in all cases do we just stop the payments, but we do depending upon the circumstance. But at the very least, we’ve reduced the payments. For example, the client I told you about who didn’t have any other financing but had these seven contracts, was paying at the time that he engaged me, $53,000 a week. Per week in payments to the MCAs. When I got involved immediately, I cut those payments to just under twenty thousand dollars a week, which was still a significant amount of money, but far less so. He had been paying and I bought him enough time over the course of a couple months to get his business back performing well. So while his payments continue to only be now about $25,000 a week, he’s on much firmer ground financially. He can meet those payments. The MCAs are working with us in order to be paid over a longer time line so that his business ultimately will come out of this MCA debt and financially be better off entirely.

CM Do you also help the borrower ? Let’s just take the example that you’re able to work out a favorable payback for the MCA and but the you get you get the borrower in a position where maybe they need alternative financing in order to help them pay that out. Do you also connect them with mezzanine financing or other senior debt financing that could allow them to take out that that MCA debt totally?   Yes, and depending upon the situation, I have arranged to introduce my clients to MEZ lenders who are willing to subordinate their loan to that of a senior lender such as a bank or a factor. And by negotiating with the MCAs to take them out for less than one hundred cents on the dollar, we get the MEZ lender to refinance that package.And then where my client is left is that they have a senior lender or factor followed by a term loan below that, that they’re paying typically an interest rate of about 30-32 %. So financially, they’re in a much better situation. And as I said earlier, the factor and lender are happy to see that because their credit risk is has been reduced.

CM That’s excellent. So you threw out the 33-35% number and we started with 100 to 75% interest rate for the MCA debt. Then you’re down to a more favorable 30 to 40 percent. And if you compare that, that just makes people’s head spin because you compare that to what we see regular mortgage rates at at the 3-4% rate. So if you’ve got clean credit and you’re going through traditional bank financing, then you’re in the 4 to 5, 3 to 5% to say 3 to 5 % range. So that really provides some perspective to the type of interest we’re talking about.

MM Sure, but in this particular case that I was talking about, this client’s average interest rate amongst the seven transactions he took down on an annualized basis was 273%.

CM Wow.

MM So if he were to take a term at term loan and it would typically be 9 to 15 months, he’d pay 30 to 32%. And remember, at the end of that term, 9 to 15 months, he has no debt.

CM No debt. Right. That’s that’s incredible.

MM So it’s a tremendous advantage.

  CM Absolutely, Mark, that would be this like Santa Claus coming if you’ve taken him  from to over 200% apr down to 30 percent. So that’s that’s a remarkable achievement.

MM I think so.

CM Yeah, what do you think is it’s not what do you think ? What do you see the typical industry that is this using factor debt and that is using the MCA debt. Can you can you narrow it down to a to a few industries ?

MM Well, the traditional factor and remember, factoring is alternative financing. Factoring is principally for a company that cannot qualify for bank financing, either a line of credit or ABL financing for a number of reasons. It could be their credit history. It could be their operation. It could be a number of reasons. And so the factoring industry is alternative financing for those people in terms of the industries that factories serve. They serve all kinds of industries, from manufacturing to service industries, most notably temporary staffing to other kinds of service industries like law firms, accounting firms, medical practices. And so it’s pretty much any type of industry where the company has difficult cash flow situations. And so what happens in factoring is the factor buys their invoices, funds a high percentage of that invoice on day one upon purchase, and it smooths out the cash flow for the company. And so there are factors that work in all kinds of industries and there are specialty factors who focus on certain types of industries, like transportation for truckers, like construction for construction companies, like food products, which is covered under a federal law called PACA. And then there are general factors who do a mix of everything, like staffing, like other service companies, like manufacturing, etc. And so these companies provide the necessary financing to carry those companies. And I don’t think I answered your entire question.

  CM I think that was good to that kind of gives people a flavor of the industries that are in the in the taking factor debt as well as I would say that most of your MCA clients probably also have factored debt. So they’re they’re…

MM That’s true.

CM Yeah, and the allure of that is if you have the cash flow shortage or a crisis in cash flow, then and if you have receivables that have that, you executed receivables but you haven’t been able to collect, then you’re able to sell those receivables, get money. So the allure of that is that it can it can take care of your cash flow needs quickly. However, it’s you really think about it. It’s a it’s a one time hit and then you give up a lot of profit margin in order to get that cash solved on day one.

MM Well, here’s the thing that factoring serves, if you look at a typical transaction where whether it’s a manufacturer service company sends out an invoice today, statistically most invoices turn anywhere from thirty to forty five days, some term faster, some term. Slower. Right, but what that means is that the company sends out an invoice today but won’t get paid on that invoice for anywhere from four to six weeks, and yet they have their expenses every week, most notably they have payroll expenses, rent, taxes, insurance, etc. And so what factoring does is it gives the company cash today, they get the balance of it when the invoice is paid. And so, as I said earlier, it smooths their cash flow in order to meet their expenses.

CM Right. And that really highlights the importance of invoicing as quick as possible to because if there are 30 days late on preparing the invoice, that just adds another 30 days to that 30 to 45 day collection period that you stated. So it’s all of that just compounds. And if you don’t have the cash reserves to cover that, those expenses that you’ve incurred, then that that leads you to call the the Factor company to get a factor arrangement in place.

MM Correct.

CM Yeah, it’s a you’re in a you’re serving a high volume, high risk industry and your services are greatly needed. So, you know, there has been an incredible amount of money printing in the past year. So how has that affected your business and the the alternative financing world that we’re talking about more ? The Fed is just printing money. There’s more there’s more federal money available. So how is that affected that that industry ?

MM Sure, what has happened in the past year with the CARES Act, PPP program, this affected lenders as much as businesses as follows. When the PPP first phase came out just about a year ago, a little less than a year ago, it was a panacea for small to medium sized businesses because they could turn to the federal government, get a loan almost immediately in a number of weeks, typically.

CM Right.

MM And it gave them on a projected basis a sum of money that would carry them probably over twenty four or more weeks, actually. And so that was great for the businessmen, for the MCAs all of a sudden they had a slower need in the marketplace for their money and it smoothed out the bank and factoring world from having to over advance money to the suffering client that they had because of this federal money. But of course, as soon as that federal money was evaporated by the use by the company, then we saw an uptick again in the MCA world because they had to go back into the MCA world in order to get more funds to operate. Now, of course, we have the second phase of the CARES Act, PPP loan, which is going on right now. And the same thing happens as soon as that money comes in from the feds. The owner of the company feels a tremendous sense of relief and everything is copacetic. They can operate smoothly, but that money runs out fairly quickly because when you think about it even if they have that kind of money for three months, three months is not a long period of time. And so what will happen is it will push these companies back into the MCA market. Now, of course, one of the results of this past year between the economy, the pandemic and the different businesses out there not doing well, it even included the MCAs. There are MCAs that didn’t survive this past year like other businesses, because there two things happened. Number one, the money they already had lent wasn’t being paid back because of the companies that were ultimately going out of business. And number two, they weren’t getting a call for more business because of the Fed funds, and so therefore there were a lot MCAs, particularly smaller ones, that went out of business or were acquired and swallowed up by larger MCAs. So the MCAs are still out there and they’re active, but they certainly have suffered within the past year with tremendous losses on the transactions that they had entered into prior to the pandemic starting a year ago.

CM Interesting. So what do you see ? This is kind of our our closing question here. But what do you what do you see the the outlook for the MCA world ? Do you see the Fed money drying up in three months ? And then there’s going to be those businesses that typically would have been in that that market they’re going to go back to the to the MCA debt in about three months or four months. What do you what do you predict on that ?

MM Yeah, I believe that the MCAs will continue to do well, those that have tremendous funding and these MCAs have tremendous funding of their own, they’ll be a call for MCA borrowing and that will continue for the companies that always operate just on the fringe of profitability.

CM Right.

  MM And so the MCAs will be there. It’s like I said, easy to take an MCA loan, all you have to do is go online, fill out a couple pieces of information, and next thing you know, within twenty four hours, you have money in your bank account.

CM Magic.

  MM But then, of course, yeah, it’s magic, but it’s it’s it’s a magic that kind of evaporates almost immediately.

CM Not not one with a good ending. So Mark, as we’re leaving, tell the audience how they can get a hold of you, your your website and your email address.

MM Sure. The name of the company again is MCA Stacking Solutions. The website is just that www.MCIStackingSolutions.com. And my email address is my [email protected] and my phone number is 973-868-0767.

CM All right. There we have it. And Mark, this has been another great show on MCA debt, how to how to help those people and the solutions that you provide those people that get into the stacking dilemma. So call Marc Mellman to get out of that suicide debt and to restore some sanity to your cash flow into your business. So, Mark Mellman, thank you so much for being a guest on Answers That Count. Thank you, everyone. Check us out every week right here on answers that count. I’m your host, Charles Musgrove. Have a great day. Have a blessed week.