Merchant Cash Advances evolve to Online Lending Platforms – Part I

We are seeing financial innovations over the last few years that we have not seen ever. Period. Small business lending has seen the brunt of these changes, and these innovation can be directly attributed to data, analytical models, and improving credit scoring models. Before the financial recession of 2008, banks made small business loans based on various automated technologies. But since that time, they have backed off and the void has been filled by Peer to Peer or Marketplace lenders, and Merchant Cash Advance (MCA) products that have evolved beyond financing a company’s credit card receivables.

Just what are MCAs? There are two types of MCA products:

  • Traditional Merchant Cash Advance product based on Credit Card Receivables- This is the historical product, where a funder underwrites future credit card receivables based on historical receivables and the funder is paid back from a percentage of days sales direct from the credit card processor. For example, a funder may lend $100K for the right to get $120K over the next 12 months by taking a small % of each days credit sales. This is very popular with restaurants, small retailers, and others that rely on credit card sales. It acts like a daily amortized term loan which is an unsecured, but it is not a loan, but a purchase or advance on assets without a required amortization schedule and fixed maturity. The product is very popular.
  • Bank Only ACH Product which funds all Revenue, not just credit card receivables – Here, the funder does not look at credit card cash flow but overall revenue. If a business has $1.2m in cash sales the funder will ACH debit for a certain percentage. This product has become more popular these last four years.

Merchant cash advance financing requires no third party interaction with the borrower’s customers. With the MCA, you send your historical credit card or ledger sales data and you can have an advance later today – OnDeck, Kabbage and Lending Club and others are raising the stakes here and raising gobs of money to do so.

From a small business perspective, these products can be attractive. Many small businesses do not have great financing options, and if they do have a customer that offers them dynamic discounting, it only impacts a percentage of their sales. What online lenders did was create a way to move beyond credit card receivables – this opened up many new business opportunities.

Tomorrow we will explore how MCA differs from Factoring, and why it poses a threat and also why the MCA sales model may lead to high risk lending.

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First Voice

  1. MIchael Martin:

    ACH daily funding can come in two varieties and the agreements can differ greatly. Make sure you read the fine print before moving forward.

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