2023 is shaping up to be an eventful year for the alternative SME lending sector.
And yet, with so much ahead of us, it’s easy to forget what happened in the merchant cash advance industry last year. But don’t worry, we’ve got you covered.
In this article, we’ll recap the five most significant stories that shaped the MCA industry in 2022.
Big players joining the industry, increased regulation, an unexpected shift in demand for alternative lending products…let’s get to it.
1) FTC Bans Several MCA Companies
In 2022, the Federal Trade Commission (FTC) permanently banned several MCA companies from the industry for using deceptive and illegal means to seize assets from small enterprises, non-profits, and religious organizations.
Namely, the FTC filed lawsuits against RAM Capital Funding and RCG Advances.
Both were accused of deceiving SMEs by requiring personal guarantees and upfront fees, extending less funding than promised, and debiting more from consumers’ bank accounts than they said they would.
Not only that, but the FTC claims both companies made unauthorized withdrawals from consumers’ accounts and used unfair collection practices, including threatening physical violence.
These bans serve as both a:
- Reminder for SMEs to only engage with reputable MCA organizations.
- Warning to SME lenders to be vigilant about their lending practices, and ensure they are operating in a responsible and ethical manner.
While the majority of lenders in the industry are reputable, some bad actors do resort to shady practices that harm small enterprises.
2) Regulation, Regulation, Regulation
Regulatory changes are well underway for merchant cash advances in the U.S.
Recently, several states passed new MCA regulations, concerning disclosure and registration requirements for non-bank funders.
In January 2022, New York passed a disclosure law that requires non-bank funders to provide specific disclosures in the loan paperwork for corporate and small enterprise borrowers.
Similarly, California enacted Senate Bill 1235, requiring cost of credit disclosures to borrowers whose business is directed or managed from California.
Utah and Virginia have also recently passed laws that require lending disclosures, and also require that providers of MCAs register and obtain a license with the state.
This tightened oversight brought pushback from MCA lenders.
In California, the Small Business Finance Association (SBFA) is suing California’s Department of Financial Protection and Innovation (DFPI) over regulations that the association claims are unlawful. They claim that APR disclosures are defined and governed at the federal level by the Truth in Lending Act, and that further regulations would only serve to confuse customers.
3) DoorDash Joins the Industry
DoorDash, the food delivery business, has ventured into the merchant cash advance business. By partnering with Parafin (a fintech business lender), they now offer quick cash advances to restaurants based on their potential future sales.
While it may be a new venture for DoorDash, the move is not entirely surprising, given that the company has been expanding its services beyond food delivery.
The move allows DoorDash to offer working capital to restaurants that can’t secure traditional bank loans or lines of credit. The eligibility for the merchant cash advance is based on restaurants’ sales performance as observed on the DoorDash platform.
This could indicate a growing merchant cash advance trend, where non-traditional lenders enter the MCA market.
Although it’s soon to know whether DoorDash and other newcomers will be successful in this space, SME lenders must be on their toes as competition and disruption walk in.
4) NextPoint Financial Acquires and Closes LoanMe
In just under two years, NextPoint Financial acquired, and then closed LoanMe, a (former) provider of personal and non-business loans.
The company decided to cease all loan originations due to unsustainable debt related to the LoanMe acquisition and the cessation of LoanMe’s operations.
This move enabled NextPoint to refocus its resources solely on its Liberty Tax and Community Tax businesses, with a substantially strengthened capital structure.
With LoanMe’s reputation for lending expensive products, its closure may signal a shift in focus among alternative SME lenders: to move away from high-cost financing options such as MCAs, and instead offer more traditional lending products, such as term loans and lines of credit.
Increased competition, regulatory scrutiny, and a growing recognition of the long-term benefits of more sustainable lending practices are all behind this trend.
By moving towards these more traditional lending products, alternative SME lenders can offer their customers lower rates and better terms, while also reducing their own risk and improving their overall profitability.
5) Amazon Launches An MCA Program
In November 2022, just like DoorDash, Amazon also partnered with Parafin to launch an MCA program for its sellers.
Starting in early 2023, the program promises eligible US-based businesses on Amazon’s platform access to capital within a few days with no fixed term, no personal guarantee, no credit checks, no late fees, and no collateral requirements.
With a payment schedule determined by a fixed percentage of their gross merchandise sales, businesses can access capital from $500 up to $10 million.
MCAs will be the latest addition to Amazon’s existing financing solutions portfolio of term loans, interest-only loans, and lines of credit.
Like with DoorDash, Amazon’s entry into the merchant cash advance market could increase competition for existing alternative SME lenders.
The company’s vast resources, customer database, and brand recognition may make it an attractive option for SMEs seeking funding, potentially limiting business for existing lenders.
The final impact on SME lenders remains unclear and will depend on various factors, including the specific terms and conditions of Amazon’s offering and the overall risk tolerance of sellers, and their demand for a flexible financial product with a greater risk profile.
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