The merchant cash advance (MCA) industry is booming—that’s no secret.
Because MCAs are more accessible than traditional small business loans, and they feature more flexible repayment options, they are a popular way for merchants to get their hands on cash quickly.
The high demand for MCAs has sparked fierce competition, as more brokers and funders look to get in on the action.
While this competition has driven industry growth, it also comes with a downside: some MCA providers are taking a short-term, bottom-lined focused approach to their merchant relationships.
Yes, profit is a must in any business, but not at the cost of integrity. MCA providers that focus on fair and transparent funding can help build a prosperous future for both their business and their clients.
In today’s article, we will take a look at how sustainable funding benefits all MCA stakeholders.
MCA Industry: Where Are We Today?
Since the MCA industry took off in the early 2000s, it has seen consistent year-over-year growth. It is estimated that the industry will reach close to $26.3 billion by 2029.
A closer look reveals one key factor that makes it clear why SMBs have turned to MCAs for funding: in March 2023, while the approval rate for small business loans from big banks was 14%, MCAs had an approval rate of 90%.
But there are other reasons that have led to the skyrocketing growth of the industry, including:
- Accessibility: new SMBs, or those with lower credit scores, don’t meet the strict requirements for traditional funding—alternative lending is much more accessible.
- Speedy approval: while traditional loans take weeks to approve and fund, MCAs can typically be approved and funded within days or even hours.
- Flexible repayments: MCA repayments are based on a percentage of future sales, meaning they are adjusted based on how a business is performing. In contrast, traditional loans have fixed payment schedules and interest rates—regardless of whether a business is profitable.
The merchant cash advance industry still has room to grow—and more MCA providers are entering the playing field.
At the same time, amidst this boom, regulators are starting to take a closer look at the industry. In an effort to prevent predatory funding, MCA regulations are being developed at the state level across the US. And while most MCA providers value responsible funding, it only takes a few bad actors to give the industry a bad reputation.
What an Unsustainable MCA Looks Like
For some time, merchant cash advances have flown under the radar of regulators, as technically they are not loans—they’re considered a purchase of future sales.
MCA providers who don’t actually care about the success of their merchant clients can easily take advantage of this situation.
Here is a typical example of an unsustainable MCA deal that focuses on short-term profit over long-term growth:
An SMB is looking for cash, and an unscrupulous MCA provider knowingly offers the merchant a deal that they cannot realistically pay off (based on current financials). The merchant takes it, and after a few months, when they find they can’t repay it (but still need capital), the provider persuades the merchant to take on another MCA to help pay for the first one while they continue to operate their business.
This can quickly lead to the merchant being caught in a dangerous debt cycle, taking on one MCA after another, in a practice known as “stacking.”
As bad as this scenario is for the merchant, MCA providers who act this way hurt their own business as well. Precisely because MCAs are not classified as loans, providers are not entitled to assets in the case of bankruptcy or liquidation. In other words, the MCA provider not only has no way of recuperating the cash they borrowed if the merchant’s business folds, they also run the risk of taking a big hit to their reputation.
When Stacking Goes Wrong
Stacking MCAs is not inherently problematic (in fact, responsible stacking is the industry norm), provided the merchant is not overleveraged. This practice, when utilized responsibly, could be advantageous for all parties involved.
And yet, when stacking goes wrong, it can snowball quickly.
Let’s say a merchant has a monthly revenue of $20,000, and stacks three MCAs. Their monthly net profit before their MCA payment is $4,000, and their MCA payment equals 10% of monthly revenue.
With one MCA, the merchant is still profitable (i.e., $2,000 MCA payment, $2,000 profit).
With two MCAs they break even (i.e., $4,000 MCA payment, $0 profit).
With three MCAs, the merchant is overextended (i.e., $6,000 MCA payment, -$2,000 profit) and is paying 30% of their monthly revenue to their MCA provider.
So we can see with this very simple (but enlightening) example that both the merchant and the MCA provider are playing a losing hand. The merchant because they are overleveraged, and the MCA provider for the same reason + reputational damage.
It’s genuinely a bad deal for everyone involved.
This is where reputable MCA providers are different: a funder invested in the financial health of its merchants will first carefully assess what is financially feasible before encouraging a merchant to take on multiple MCAs. It is an approach that considers the interests and profitability of all parties, not just the stakeholders on the funding side of the agreement.
Advantages of Sustainable Funding
While sustainable funding might appear as excessively altruistic, it actually provides funders with a wealth of advantages. This approach isn’t merely about compassion—it’s about fostering a responsible, financially stable environment that promotes beneficial practices for all involved.
Here’s a closer look at some of the strategy’s benefits.
1. Become a More Attractive Financial Partner
Because of a few dishonest MCA providers, the entire industry faces skepticism. It’s essential for MCA providers to build credibility and establish trust, as these two qualities demonstrate a commitment to long-term relationships. Offering fair, transparent terms helps create a positive reputation, which brings in new customers, and perhaps most importantly, repeat business.
2. Repayment Rates Will Increase
High default rates are bad for business. Realistic repayment schedules (i.e., those informed by the financial reality of a merchant’s business) empower merchants to meet their repayment obligations on time and more easily. High repayment rates also mean merchants stay in business, brokers earn commissions for completed deals, and MCA providers recover their investment and then some.
3. The MCA Industry Will Grow
In all industries, when customers have a good experience, they’re likely to come back again and recommend the service—funding is no different.
When merchants feel supported and succeed in reaching their business goals, they will likely return to the same MCA provider when they are in need of more capital. Sustainable long-term relationships are the key to growth for brokers, funders, and merchants.
Nexi: Fast, Sustainable Merchant Cash Advances
A merchant cash advance could be the right kind of funding for your business if you have frequent sales and need cash quickly.
If you’re a merchant on the hunt for a merchant cash advance, make sure that you perform your due diligence and look for a MCA provider with a rock-solid reputation.
At Nexi, we are here to guide your funding experience. We offer every merchant the customized financial support they deserve. Responsible financing is at our core—no shady back-door tactics allowed.
We’re here to empower you to reach your goals, one step at a time.
If you’d like to explore your financing options, reach out to our team today.