As the summer months begin to wind down, with their slow, sultry and steamy last ballad, a period of quiet reflection is in order. For me, Labor Day weekend has always been a period of self-assessment and reinvigoration, marked by a certain excitement that stirs the innards and inspires the soul. Taking stock of what I have accomplished over 2/3 of the year, it offers an opportunity to gauge my successes and failures with real world metrics, make the necessary course corrections and ensure my fourth quarter effort is in consonance with my goals for the year. Nothing serves to ignite my ambitions more than restful indulgence in the fruits of my labor; the most visceral of reminders of what an unremitting work ethic rewards. In this vein, I would like to expound upon how those in the MCA alternative lending sphere can make sure they finish the year at the pinnacle of success – and how ARP Equity Group provides the impetus to reach the summit of excellence and self-actualization.
The following is a simple use case for how an alternative lending company (MCA company) can benefit enormously, both financially and reputationally, through a credit facility and professional relationship with ARP Equity Group. This example showcases a client that meets our minimum monthly funding level and what they stand to earn (based upon an above average default rate, overhead and “miscellaneous fees and expenses” schedule). The minimum monthly funding level for this example is $1,000,000.00
Use Case A
Client A is an alternative funding company that funds approximately $1,000,000.00 per month in advances to merchants. Client A advances funds to merchants at a factor rate that varies between 1.30 (for a merchant with exceptional credit and consistent bank statements) and 1.49 (for a merchant with poorer credit and multiple positions). For the purposes of this example we shall arrive at an average factor rate of 1.40. The merchant default rate we shall place at 12%, and overhead costs at 3%, giving us a 15% reduction from our average factor rate of 1.40 to a gross collection of a 1.25 factor rate. We shall further extrapolate with an added “miscellaneous fees and expenses” rate of 5% – lowering the return to a 1.20 factor rate. The term shall be fixed at 6 months (120 payments, Monday through Friday). This shall produce an average daily return of $10,000.00 or $200,000.00 per month, with a net profit of approximately $1,666.00 daily, or $33,333.00 monthly or $200,000.00 over the 6-month term.
Client A engages with ARP Equity Group (herein “ARP”), remitting their static pool of existing advances which reflects the originated amount, factor rate, performance and default rate to date. ARP, in conjunction with its lending source (herein “The Lender”), evaluates Client A’s static pool for approval to engage in a 50/50 funding split with Client A for a trial period of 90 days (herein “The Trial”). During this time, Client A will effectively double the amount of capital available to advance to merchants, splitting both the risk of funding to the merchants as well as the profit or return on investment from the advances, with The Lender. If, after The Trial, Client A’s advances to merchants are reflective of the representations made in the static pool at the commencement of engagement, The Lender will extend a formal credit line to Client A, equal to the annual amount Client A advances to the merchants (in our example, Client A advances $12,000,000.00 annually, so The Lender would loan $12,000,000.00 to Client A at an annual rate of 7%-20%, (payable monthly or quarterly depending on Client A’s static pool and default ratio). In addition, The Lender will participate in the syndication of Client A’s advances at an 80/20 split or ratio (with The Lender funding 80% of the advance and Client A funding 20% of the MCA). This allows for Client A to risk only 20% of the advance amount while still profiting at an approximate rate of 20% (in our example) on the full amount advanced (in this case 20% of $24,000,000.00 every 120 payments [6 months] or $9,600,000.00 annually). Using an annual interest rate of 15% on the $12,000,000.00 The Lender loans to Client A, Client A would repay the credit facility at a rate of 1.25% per month (or possibly 3.75% quarterly if approved for quarterly payments). Also note, that the MCA company only pays interest on the credit facility upon using it – once the facility is paid back, it costs nothing to be ready and available for use. This example also doesn’t consider the professional service fees and other closing costs MCA providers traditionally charge – all of which the MCA company keeps. With simple arithmetic you begin to understand why any MCA company who is looking to expand their reach and funding base would be mad to not take advantage of this opportunity.
Over this upcoming Labor Day weekend, I encourage all alternative lending companies to honestly think about where they are currently and where they see themselves in the future. Enjoy your holiday, you’ve earned it. But also take a moment to consider my words here – the fourth quarter is where the cream rises to the top – what will your thoughts about your performance be this New Year’s Eve? I bet if you read this, you’ll think of me and ARP Equity Group for an instant – either celebrating heeding my words or imagining what could have been over the last 4 months of the year.