By Chad Otar
It can be tempting to put merchant cash advances (MCAs) in the "old news" box and deem them unfit for the future-forward fintech sphere. And yet, here we are. MCAs are going stronger than ever, with a three-year growth in U.S. sales of $6.7 billion, according to Pymnts.com.
MCAs might have emerged as a way to smooth the peaks and troughs of small and medium business (SMB) cash flow, but they've evolved to become a flexible financing tool based around projected cash flow. So it makes sense to track this evolution against the future of fintech.
In this article, I'll share insights on how fintech will allow MCAs to become more mainstream. I'll also explore how—and why—SMBs need to take advantage of the rise of fintech-driven MCAs.
Creditworthiness and time in business are major issues in SMB lending. MCAs allow lenders to focus on another area: revenue. Whether a business is established or has been operational for only a few months, revenue trumps longevity with an MCA.
Lenders can examine the cash flow history of a business and use this as a barometer of how much cash they can advance. Because these figures are instantly verifiable, the turnaround time from MCA application to cash-in-hand can be as little as a few hours.
Repayments are made directly from credit card transactions—or in some cases, total cash sales—on a daily or weekly basis, as a percentage of that period's gross sales.
Fintech, AI, blockchain and IoT play variable roles in all areas of lending—none more so than with merchant cash advances. In the digital era, disruptive innovation bubbles up from the bottom—a product with a minimum viable feature effectively grows its way up the food chain. The MCA is this type of product: it began as an inferior alternative to traditional lending. It did, however, have two major draws: speed and flexibility.
Through various fintech applications, lending speed and flexibility have skyrocketed. Automated credit models can be crafted around machine learning, meaning raw source information is translated and analyzed in record time. Alternative data sources can be mined to enrich—even entirely replace—FICO score requirements. Data from the Internet of Things (IoT) not only enhances the user experience, it also allows lenders to draw information from social media, tax returns, and other financial activity.
The beauty of AI, blockchain technology and the IoT is that they can capitalize on the digital footprint of any SMB to make the MCA application process faster, easier and more seamless. The benefit to businesses is huge:
Most MCA financing relies on proprietary transactional data. Does this give MCA companies a competitive edge? At this point, yes.
Also, ecommerce giants may have their own company-specific lending model—based on users' habits as they interact with that specific site—but fintech companies have been developing reliable digital financial analysis to the point of mastery. Fintech focuses on a level of data analysis that spans global business models and universal financial performance. And fintech's contribution to lending supports and develops new models of underwriting.
When SMBs want reliable lending, fintech marketplaces are the prime choice for MCAs and traditional lending.
Fintech has paved the way for massive growth in MCAs for small businesses. As many businesses prepare for a new world post-COVID-19 and the lockdown of entire industries, making smart financial decisions will become even more vital to business longevity.
Understanding how an merchant cash advance can support small and midsize business enterprises—and how fintech is enabling the fastest, most user-friendly application process in history—could mean the difference between success and failure in business moving forward.
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