For small to medium businesses, accepting credit card payments, Merchant Cash Advance (MCA) is quite a convenient financing option, when working capital is required on an urgent basis. Now the question that might arise is; how does the MCA industry work? So, fundamentally, MCA companies offer advances in exchange for a certain percentage of the borrower’s future credit card sales. Hence, more than a loan, the transaction can be considered a kind of sale, where the borrower purchases the advance and repays the amount along with the fees later. As the repayment of the fund takes place through a percentage of sales, the amount recovery often gets slow when revenues go lower than expected. However, to understand if MCA is ideal for SMBs, it is quite crucial to get a clear idea of where the MCA industry currently stands and how it works.
Research says the MCA market is anticipated to witness impressive growth, estimated to reach close to USD 1140 billion by 2028 with a 15.5% CAGR(as per Adroit Market Research). The reason behind the noteworthy acceleration of the growth graph is the increasing popularity and adoption of MCA across small to medium businesses(SMBs), belonging to numerous industries. The emergence of SMBs all over the world and their requirements for working capital or funds for business expansion are immensely fuelling the MCA industry. Though the interest rates offered by MCA lenders are higher than that of the banks, MCA offers multiple benefits in terms of the application process, approval time, repayment term etc., which often turn out to be extremely convenient for SMBs. The rapid adoption of Point of Sales or POS terminals with digital transaction systems gaining significance is expected to bring new growth opportunities for the MCA industry.
How MCA Industry Works:
Unlike traditional bank loans, MCA offers business owners advances in the form of cash in return for a pre-decided percentage of the business’s future credit card sales. In the case of MCA repayment, the borrower gets two means to adopt the system.
The borrower can secure a lump sum upfront.
The borrower can repay by letting the lender deduct the remitted debits on a daily or weekly schedule, till the entire amount is repaid.
MCA is ideal for businesses that have higher credit card sales volume. Besides, it is quite a considerable option for SMBs that neither have collateral nor good credit scores to qualify for a bank loan. Benefits like flat access to cash, borrowers’ choice of fund use and flexible repayment terms, make MCA desirable for many start-ups and small businesses across the globe. New players are constantly penetrating the MCA market with the goal of outdating the traditional financing loan models and replacing them with new-age solutions. The rapidly increasing competition from the new players and constant upgrades in the financial models and system solutions is expected to boost the MCA market. It comprises firmly positioned local as well as well-connected global players.
Post-COVID Market Scenario:
Due to the advancements in the fintech industry and the availability of easy online lending services, quick and hassle-free fund disbursements are now possible. Since the pandemic hit the world in 2020 and billions of people all over the world lost their jobs, a surge of small businesses has been witnessed. For such growing businesses, which cannot afford to slow down, late loan approvals can act as a big hindrance. In such a situation, MCA can turn out to be a game-changer. MCA was initiated in the year 2008 and since then, the industry has come a long way. With no fixed insurance rates, MCAs offer flexible payment terms with no restriction to the fund usage, which is what most small businesses prefer. Besides, the option of daily payment agreements often turns out to be beneficial as they allow the borrower to pay a much smaller amount every day. In the case of a monthly payment structure, one needs to pay a hefty amount each month. As MCAs are not federally guaranteed, lenders get the freedom to set up the terms as per the conveniences of the borrower. Recently, the interest rates for MCA have dropped quite a bit, due to the increased competition in the market. The higher the business’s sales, credit score and operating history, the lower the risk of the lender. However, the interest rates generally vary with different lenders. Therefore, before applying for MCA, SMBs are always suggested to do thorough research on the MCA lenders available and the interest rate each one is offering.