The economic impact of coronavirus is myriad and widespread. The full impact of job losses and halted economic activity has yet to be observed in many specialty financial assets’ credit performance. When revenues and incomes are disrupted, both consumers and businesses often prioritize which debt to pay off first. They may not be willing to pay specific bills, even if they can, to preserve cash for prolonged uncertainty. However, this is not the case for MCAs, as payments are automatically drawn. Therefore, cash flows are aligned with and reflect true business performance free of the impact of payment prioritization. MCAs are unique in the sense that payments are daily or weekly and are linked directly to income.
According to the Federal Reserve’s last study, eight percent of all small businesses sought merchant cash advance in 2020, and eighty-four percent of those applicants were approved.
In this post, we will detail some of the specific challenges the Merchant Cash Advance market is currently experiencing, the factors that influenced its growth, and how MCAs had to incorporate the use of technology to organize the business and communicate with all the industry players.
A market gap
Similar to the financial crisis of 2008 and the subsequent pushback among traditional lenders from the small business financing space, today’s economy displays familiar skepticism among banks when it comes to supporting their SME clients. There is a convergence of factors creating a promising opportunity for new entrants to the market, including the possible reluctance of banks to finance small businesses and the growing number of businesses looking for capital to survive. Many MCAs are now exploring collaborations with FinTechs to optimize a variety of workflows, including underwriting and loan monitoring, to strengthen the small business customer experience. The lack of a good tech tool can cost MCAs money. And now we will explain why.
Greater effectiveness = insured money
The success of an MCA Originator depends on how well it handles relationship management with Servicing Entities and Participants.
Each has its own set of unique needs that must be met. This activity requires excellent data tracking, as well as Common Metrics and Daily Status Reports. Once you have a detailed recording and a better overview of the company’s accounts, it is much easier to plan and predict the future. When you are confident in your data, you can solve issues quickly, and you can grab any opportunities that show up, with no need to fear miscalculations of inaccessible data.
Many of these institutions believe that the most relevant objective in their businesses is getting leads. However, that is as important as taking care of the flow of information among the components of the chain.
How to start organizing an MCA business? First and foremost, you need a perfect Bookkeeping compiling all financial data —from transactions to wages— and turning them into easy-to-read reports that are ready for future analysis.
In addition, it is also important to conduct proper treasury management and daily financing and payment summaries. All this without neglecting ISO management, participants and ISO reports.
The Future of the MCA Industry
The Merchant Cash Advance industry success and growth has led commercial banks to reassess their loan requirements to be more competitive with MCA providers.
On the other hand, changes in supervision are expected. One of the main differences between merchant cash advances and more traditional financing methods is that MCAs are exempt from state and federal oversight. This means that disreputable MCA providers can be left out of control, and there are no pre-set standards on interest rates or best practice procedures.
The recent boom in the MCA industry requires increased oversight to help crack down on lenders mistreating customers or setting standards applicable to this growing sector. This would help protect small businesses and provide credibility to MCA providers who are doing the best job for their clients.
The MCA industry has already been fueled and will continue this exponential growth trend due to various circumstances that came together to give it the perfect place to expand. However, it is not an easy path for those who have to adapt to a greater work flow without a previously-based structure and organization in place. Financial technology will play a leading role in this regard to continue driving the MCA industry growth.