Today's Blog by Jeff Mitelman

I have recently met with the owner of a competitor to AdvanceIt & got into the discussion about what the size of the Canadian market for merchant funding was. While the industry is in its infancy and no formal statistics exist as to what the true size of the market is I am going to take a stab at answering this question:

Rational 1:        10% of the US market

In December of 2007, a Merchant Cash Advance blog, written by the owner of an established US provider estimates the size of the US market for Merchant Funding to be approximately $850M /year. I couldn’t find any hard facts on the size of the market in the US so for discussion purposes I am going to assume this source to be an expert in the field and the statistic to be fairly accurate.

Based on GDP & population statistics Canada is roughly 10% of the US. Deductive reasoning then states that the size of the market in Canada is approximately $85M.

Instinctively, I disagree with this figure and feel that it under represents the size of the opportunity in Canada. The most significant difference between the Canadian & US lenders is the relative size and strength of the banks. In the US thousands of banks compete for business loans. In Canada 6 banks dominate the supply of funds and act in a manner that is more often considered collusion than competition. The pressure to give businesses more favorable rates or adjust their underwriting criteria to accept a broader merchant base is simply not as strong as it is south of the border. Canadian banks approach to lending is far more conservative than those of its US counterparts.

I would argue that the market size for Merchant Funding in Canada can largely be derived as a product of the loan amounts banks are declining.

According to Interac.org there are approximately 300,000 small businesses in Canada accepting debit cards. Our internal research shows that roughly 10-15% of those have unsuccessfully applied for traditional financing or are simply not eligible. Assuming conservative rates of penetration (15-20%) and an average deal size of $20,000 we believe that the market for Merchant Cash Advance in Canada for the coming year is somewhere between $120 - $150M.

I welcome your comments.