Gone are the times when merchant cash advances were the borrowers’ first pick when it came to choosing an alternative lending product. Savvy merchants who keep up with the rapid updates in the world of commercial financing will tell you that like payday loans, these days MCAs come with high fees yet they remain the only option for bad-credit borrowers.
According to Andrew Mallinger of PIRS Capital, the Merchant Cash Advance industry kicked off as a product for clients that couldn’t obtain cash from banks for one reason or another, i.e., lack of collateral or bad credit. However, the surfacing of alternative lending and the growing popularity of platforms like OnDeck is changing is the public’s opinion on merchant cash advances.
“The world of commercial funding has evolved; today, MCAs don’t automatically mean exorbitant interest rates and related fees,” explains Mallinger. There are instances where the merchant cash advances may be the most excellent financial remedy for a firm in a cash flow crisis.
For instance, retailers with traditional, SBA or long-term equipment loans, can seek short-term liquidity (in the form of an MCA) without having to worry about collateral, long waiting periods or credit.
A 2016 study by Bryant Park Capital and deBanked conducted to evaluate the confidence of small retailers in the cash advance industry discovered that 92% of micro-businesses in 2016’s Q1 showed optimism towards getting funding from this form of financial services. The researchers also found a compound growth rate of annual 56% and a collective loan origination level of $1.9 billion.
Reshaping the industry’s image
Over the years, the alternative lending platform has become a primary target for venture capitalists. And now, investors are also chipping in to reshape the face of MCAs. Last week, PIRS Capital publicized that it has designed a revolving credit line for retailers.
The rapid innovations along with the quick adoption of new technology have contributed to the changes in the face of the merchant cash advance segment.
With the help of PIRscore, PIRS Capital’s latest piece of tech, the firm intends to underwrite loans through machine learning based on a collection of data points. According to Mallinger, this unique insights and evaluation of would-be borrowers will allow the firm a competitive edge in such a crowded industry.
“This is a game-changer, as it allows us to make decisions based on past data via machine learning,” says Mallinger. “The new tech allows the system to re-teach itself on a day to day basis, noticing any new trends.”
Mallinger also said that the company is optimistic its tech will take into consideration broader economic data. And though the rise of privately-owned credit scoring models has offered most industry players a competitive edge, the process of data sharing among financial services providers could better the performance of the alternative lending as well as the credit underwriting space.
“While there are specific data points that are unique to us and we’d rather keep confidential, there are other data points that are more helpful if keyed into the national database where all lenders can have access,” noted Mallinger
The bottom line
Data sharing is a trend that’s already in practice, and Mallinger says it could benefit the cash advance market a great deal. A joint database of info among MCA firms and other lenders could raise red flags when “bad players” get into play.
Author Bio: As an account executive, Michael Hollis has funded millions by using different financial solutions. His experience and extensive knowledge of the industry has made him a Merchant Cash Advance expert at First American Merchant.