The Future of Merchant Cash Advances

The rise of alternative lending platforms has resulted in a buffet of financing options for small businesses who have been rejected by larger financial institutions with merchant cash advances being one of the top contenders. 

Unlike other SME financing options, merchant cash advances include some significant differences compared industry alternatives, the most differentiating characteristic being that they are exempt from state and federal usury regulation simply because they are not defined as loans.

According to a new report on the MCA marketplace published Bryant Park Capital, the landscape for this financing tool is shifting.  An influx of SME lending options may alter the manner in which authorities oversee the merchant cash advance industry, said the bank.

As as the volume of MCAs surges, players in this industry are creatively diversifying their options for small businesses in need of capital. The typical merchant cash advance which boasts quick cash for small business owners usually used for pressing purchases like equipment may soon being facing changes in the U.S markets, as per Bryant Park Capital.

A Rampant Market

The first- ever  “Merchant Cash Advance/Small Business Financing Industry Report” was released by the bank this year in an attempt to ascertain the growth of MCA’s. Research indicated that  the volume of merchant cash advances provided to U.S. SMEs has seen a steady increase over the last few years with projections of possibly reaching $15.3 billion in 2017.

Industry experts attribute this growth as well to the economic changes in the country. “The MCA’s appeal to SMEs can be attributed to several factors. According to BPC, the approval rate for MCA’s stands at nearly 50 percent. Funding can land in a business’ bank account within just a few days.

The report also indicated that the MCA industry has developed very unique collections and underwriting technologies: MCA’s are structured to enable Small businesses to repay their MCA via ACH transfers from their bank accounts or repay via a portion of their credit card sales on a periodically.

Consequences Of A Shifting Market

As pero BPC, the MCA is largely believed to have materialized  in the alternative lending market soon after the increase in credit card use. Making its debut in 1998, CAN Capital CAN Capital, formerly known as  AdvanceMe, is often considered to be the first merchant cash advance provider.

Over nearly two decades, MCAs, which initially resembled small business loans and included loan-like documentation that required borrowers to provide personal guarantees, have shifted away from characteristics of other loan products, the report said.

But according to some analysts, the MCA industry cannot escape the threat of regulation that hits other loan products.

BPC stated that legislation such as the Dodd-Frank and Basel III that spurred an increase of rejections to SMEs by traditional funding has led to the rise of the MCA industry. While relatively young, the merchant cash advance market remains, legislation may force the industry to take new routes in the coming years.

An influx of market competition has also begun to shape the MCA arena. Participants like Square and PayPal are squeezing margins by offering their own financing options. MCA lenders have responded by diversifying their offerings to include cheaper interest rates.

Bryant Park Capital said these market changes have largely steered MCA companies to diversify their offerings. This means offering loans, revolving lines of credit and other services, as well as shifting their strategies — offering cheaper interest rates and stricter underwriting tactics.

Still, even with these alteration within the MCA industry, the bank found that most MCA players expect more than 25 percent annual growth rates. With such vast expansion, the report concluded, 2016 will be a particularly colorful year for the merchant cash advance domaine as regulatory threats, competition, diversification and demand all heat up.