History and Evolution of Merchant Cash Advance

Introduction:

Merchant cash advances (MCAs) have become increasingly popular in recent years as a source of funding for small business owners. However, the history and evolution of the MCA industry are lesser known. In this blog post, we will explore the origins of MCAs and how they have developed over time. We will also examine the key differences between MCAs and traditional loans, making it easier for business owners to determine which option is right for them.

The Very First Merchant Cash Advance:

The MCA industry was born out of a financial dilemma faced by one business owner, Barbara Johnson. She owned four Gymboree Playgroup & Music franchises in the late 1990s but could not secure working capital to fund a summer marketing campaign. Johnson and her husband, Gary, were unsure if they could borrow against future credit card sales from parents bringing their kids back for fall classes. The Johnsons co-founded Advance Me in 1998 to develop the technology that allowed the splitting of credit card sales.

MCA Functions & Differences From Traditional Loans:

An MCA is a financial product that allows business owners to sell a portion of their future sales in exchange for upfront funding. Instead of collateral and a fixed repayment schedule, an MCA provider assesses the business's daily credit card transactions to determine the amount of future sales to purchase. MCAs are different from traditional loans in several ways:

Repayment: MCA repayment is based on a percentage of the daily credit card sales, which means the payment amount is not fixed. In contrast, traditional loans have fixed repayment schedules including monthly or bi-weekly payments. 

Underwriting: The approval process for an MCA is faster than a traditional loan. Approval is typically based on a review of the business's credit card processing statements and can take just a few days.

Cost of Capital: An MCA includes a factor rate, which is a multiplier applied to the initial amount funded. Unlike traditional loans there is no compound interest or APR.  The factor rate is used to calculate the fixed cost of borrowing.

Collateral: MCAs do not require collateral, unlike other types of loans. In contrast, traditional loans often require collateral, such as real estate, equipment, or inventory.

Credit: With revenue-based financing, lenders prioritize the financial stability and performance of your business, recognizing that your revenue streams are a stronger indicator of your ability to repay than your credit score alone.The underwriting requirements are  

Evolution:

Innovation didn't stop there. As the MCA industry continued to develop and adapt to the needs of small businesses, a new path emerged – revenue-based financing. This evolution allowed businesses without credit card receivables to qualify for funding based on their overall revenue, opening doors to countless entrepreneurs.

With revenue-based financing, business owners are no longer constrained by credit card sales alone. This financing model considers the broader picture of a company's financial health, taking into account various revenue streams. Whether it's from online sales, check payments, or other sources, revenue-based financing provides a more comprehensive assessment of a business's ability to repay.

Conclusion:

The MCA industry has come a long way since its inception in the late 1990s. It has become a vital source of funding for small businesses that may not qualify for traditional loans due to their credit history or lack of sufficient collateral. Business owners looking for funding should carefully consider the differences between MCAs and traditional loans to determine which option is best for their needs. By understanding the evolution of the MCA industry, entrepreneurs can make informed financial decisions that support their long-term business goals.