For small businesses, especially with the rise of alternative lending platforms, there are a myriad of financing options, with each type of loan product incorporating its own underwriting and risk management process for lenders.
Merchant Cash Advance (MCA) is just one category of SME finance, but one that investment bank Bryant Park Capital says has critical differences from its other SME finance cousins. .
MCAs are not considered loans by regulators and, therefore, are not subject to the same legislation that governs other types of small business finance products.
But the market for this short-term funding tool is changing, according to a new MCA market report released by Bryant Park Capital this month. As regulations evolve to accommodate an influx of lending products and technologies to SMEs, the bank said authorities may change the way the merchant’s cash advance is supervised.
And as the volume of ACMs grows, players in this industry are diversifying their offerings for small businesses in need of capital. The typical merchant cash advance – who can quickly land money in a small business bank account, usually for immediate purchases, like equipment or operating costs – could soon see changes in the U.S. market, Bryant Park Capital said.
A booming market
The bank released its first-ever “Merchant Cash Advance / Small Business Financing Industry Report” earlier this month with the aim of assessing the growth of ACMs.
According to research, the volume of merchant cash advances provided to US SMEs has regularly increased over the past two years, is expected to reach $ 15.3 billion in 2017, up from an estimated $ 8.6 billion in 2014.
[bctt tweet=”The volume of merchant cash advances has steadily increased.”]
This growth, like many alternative finance products, can largely be attributed to economic changes in the country, according to CEO and Managing Partner of BPC, Joel Magerman.
“In view of the tectonic structural changes in space, the big traditional banks withdrawing from lending to small businesses, merchant cash advance companies and other small business lenders have entered this void by returning capital. available to small businesses at high speed and efficiency, albeit at a higher cost of capital, allowing them to do so profitably, ”he explained in a declaration.
The appeal of MCA to SMEs can be attributed to several factors. According to BPC, the approval rate for this financing option is almost 50%. Funding can land in a company’s bank account in just a few days.
The industry has also developed unique underwriting and credit collection technologies, the report notes. Small businesses can usually pay off their MCA through ACH transfers from their bank accounts or periodically pay off a portion of their credit card sales.
Implications of a changing market
According to BPC, it is largely believed that the MCA appeared on the market shortly after the increase in credit card use; CAN Capital, formerly AdvanceMe, is often regarded as the premier provider of merchant cash advances, launched in 1998.
Over nearly two decades, MCAs, which initially looked like small business loans and included loan-like documentation requiring borrowers to provide personal collateral, have moved away from features of other loan products, the report says. .
But according to some analysts, the MCA industry cannot escape the threat of regulation hitting other loan products.
BPC pointed to legislation, like Dodd-Frank and Basel III, which actually led to a decline in traditional bank lending to SMEs and helped the MCA industry to grow. However, according to the report, the market for cash advances to merchants remains relatively young and legislation may force the industry to take new directions in the coming years.
An influx of market competition has also started to shape the MCA industry. Players like Square and PayPal, which now offer their own fundraising services, mean squeezed margins.
In addition, if the MCA players are largely in favor of allowing SMEs to combine their financing products, that is to say to take out another merchant cash advance when they are already financed by one, more than the half of the small businesses surveyed by BPC and unsuccessful in a recent report do not support stacking.
Today, said Bryant Park Capital, these changes in the market have largely driven MCA companies to diversify their offerings. This means offering loans, revolving lines of credit, and other services, as well as changing their strategies – offering cheaper interest rates and tighter underwriting tactics.
Yet even with these changes, the bank found that most MCA players expect annual growth rates above 25%. With such rapid expansion, the report concludes, 2016 will be a particularly turbulent year for merchant cash advances as competition, regulatory threats, diversification and demand intensify.