Updated: Sep 2, 2021
A business funding practice known as Double Funding, not the same as stacking, isn't disappearing anytime too soon from the alternative finance space.
In fact, it has only grown given the number of new entrants into the alternative finance space in the last few years.
Merchants are often well aware of the game that is being played between some stakeholders in a typical sales cycle when seeking working capital.
Still, it shouldn't be accepted as normal for a funder or broker to promote their ability to fund merchants Within ANY time frame after the merchant's most recent advance.
That timing is the main difference between Double Funding and Stacking, which is described as when a merchant gets multiple advances.
The amount of time elapsed between MCAs to classify it as double funding is debatable. I use 14 days as the time from the most recent funding to the next as that window but many would say 7 days or even 30 days until the next funding.
This won't hold back many in this industry from continuing this practice including a direct funder that recently emailed me offering to double fund without a second thought.
The email I received from a direct funder was asking us for submissions not understanding that Funder Intel does not do any brokering of deals. Though we did recently asked for guidelines from many funders to post it as a resource for brokers.
In his email he wrote, "If you already have an offer on a deal but are in need of more funding, let me know as I can get you an offer to go behind your offer", as shown in the following image:
My reply was:
Then same person replies:
With that reply, he confirms that his company will waste no time to fund after any MCA, even the same day without the other funder knowing about it. A deceitful practice that could have severe consequences for the business owner.
Again, no shock that some funders do this. It happens All. The. Time.
However, it's usually not written in an email, shared, or so casually mentioned even with justification, as if the remit % changes everything if it were to be within their parameters.
When I replied one last time to further clarify what he meant, there was no response. He must have realized what he was offering was wrong, maybe not legally, yet, but certainly in the view of many in this space.
Most of the time if a funding occurs within a few days after a previous merchant cash advance the existing funding company is not aware of the new advance being deposited. Therefore they don't know their money is being put at risk, or that the merchant and/or the ISO lied to them, or the merchant likely violated their contract and can be considered in default, or whether it was somewhat innocent on the merchant's end but the all too willing funder and a different broker set this up after the recent advance.
There are many reasons that a funder will use to justify funding within a few days.
Many more reasons and even accepted by most that stacking after 30 days is ok although the merchant could be put at high risk of being over-leveraged.
The distinction between the two terms isn't made often enough with many viewing them essentially the same.
The practice of stacking will certainly continue because there is no legal preceden to remedy this in any way. Lawsuits brought years ago by Rapid Advance against other Funders were settled or never went reached a verdict in court. Rapid reached a settlement with Pearl Capital in June of 2018 but terms were never disclosed.
In the time since those lawsuits, it seems that funders have made adjustments on their own, not relying on the courts or government intervention.
Some new policies to uncover possible double fundings include doing further background on ISOs/Brokers, increasing the remit % on their offerings, no stacking addendums, and more.
One funding company does a bank login 5 days after the funding deposit to verify the merchant didn't take another funding, also to ensure the ISO didn't charge an excessive PSF fee, and to make sure the merchant's account is in overall good shape.
Others make it clear on funding calls that if the merchant takes another advance that they will be in default and responsible for a large fee. The issue is how often is this enforced?
If the merchant cannot pay anyway it's a moot point. And if a funder asks them to pay a lump sum or a hefty default fee they will likely end up in court since the majority of merchants won't do either.
So I leave you with this. Will there be for the foreseeable future players in this space that double fund merchants? Yes.
Will many stack after 30 days as often as needed? Absolutely.
Can there be more ways to prevent this with policies, technology, and group effort? Certainly.
One example of what we are doing is when visiting a profile for an ISO we ask specifically if you are aware of that ISO double funding. Of course, this has to be an honest, first-hand experience but it is there to help others be informed of this past behavior.
We should all take steps to avoid the double funding and proud crowd.