Rethinking the merchant cash advance

Of all the loan options available to small businesses today, the merchant cash advance (MCA) may not be a borrower’s first choice. Like the payday loan, the MCA has a reputation for paying high fees and is sometimes the only option for borrowers with bad credit history.

“The cash market industry started out as a product for unbankable clients,” said Andrew Mallinger, COO of PIRS Capital, in a recent interview with PYMNTS. “It was for restaurants that had no collateral or credit score to apply for a bank loan. “

The rise of alternative loans and the familiarity of growing names like OnDeck, however, are starting to change the public’s perception of merchant cash advance.

“The world of credit has evolved,” Mallinger explained, adding that today, MCAs don’t necessarily mean exorbitant interest rates and fees. There are also scenarios where a merchant cash advance may actually be the best financial option for a business in need of working capital.

“We see a lot of clients who already have a long-term equipment loan, or an SBA loan, or a loan from a traditional bank or a factoring line, and they are looking to free up short-term cash. of their business, ”he said. “When you take out an SBA loan or an equipment loan, you have to have some type of collateral to pledge, and that money can dry up quickly. We come without collateral.”

A 2016 study by deBanked and Bryant Park Capital aimed to assess confidence in the merchant cash advance industry and found that 91.7% of small businesses in Q1 2016 expressed optimism about accessing loans from this segment of the financial services sector. Among the lenders analyzed – who primarily offer cash advances to merchants – the researchers calculated a compound annual growth rate of 56% and a combined loan origination volume of $ 1.9 billion.

Investors are also coming to support the development of the cash advance industry to traders. Earlier this week, PIRS Capital announced that it had secured a revolving line of credit from an unnamed institution to continue providing working capital to borrowers, while the alternative lending space as a whole has become an important target. for venture capitalists in recent years.

One of the driving forces behind the evolution of the reputation of cash advances to merchants is industry participation in technology adoption and innovation.

PIRS Capital recently launched its proprietary credit scoring technology through PIRScore, a technology that uses machine learning to take out loans based on a large number of data points. Mallinger explained that this unique insight and analysis of potential borrowers gives the company a competitive advantage, which is now essential in such a crowded industry.

“It’s a game-changer because we can make decisions based on past data through machine learning,” he explained. “The model is relearning itself every day, finding new trends. For example, in December in Louisiana, is there a downturn in the trucking industry? The model can find its way to that trending rod and take decisions based on that. “

Going forward, he said the company hopes its technology can take into account broader economic data as well. And while proprietary credit scoring models give every lender a competitive advantage, the shift to data sharing in the financial services industry could find its way into the alternative lending and credit underwriting space, noted. Mallinger.

“There are some data points that we need to keep to ourselves, and some things that are unique to us,” he explained. “But there are other data points that we would like to share and put in a national database with all the other lenders.”

There are already companies doing this, but Mallinger noted that the market for cash advances to merchants could be a particularly big benefactor of this trend. Since MCAs are not technically loans and are based on forecasts of future income, the risks can be significantly greater and fraud is a significant risk for MCA companies.

A collective database of information between lenders and MCA companies could offer red flags and warn of “bad actors,” the executive said.

Data sharing is not quite at this level yet, but as the financial services industry opens up and the MCA market strengthens its reputation with borrowers, the opportunities for machine learning, the artificial intelligence and sophisticated data analysis technologies are vast.

“It was a struggle for the first two years to remove the stigma,” Mallinger said. “But there are bigger lenders in that space now – Wells Fargo has money in that space, Capital One does too. It’s starting to trickle down to merchants and small businesses. They’re starting to understand that if that’s the case. is the right solution for them, then the stigma of cash advances from merchants is gone. “

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