The date is early December 2019. The place is a busy main street in suburban America. Christmas decorations cling to every surface and music plays in every shop—the holiday season is in full swing.
Economists and financial analysts are surprised by how strong the economy is, and they’re predicting a correction, but nobody is sure what would cause it.
Fast forward two months: the WHO has declared a public health emergency due to the novel coronavirus, and, just like that, the world goes into lockdown. People can’t go to work, school, places of worship—anywhere except the grocery store and healthcare facilities.
As if someone flipped a switch, commerce came to an abrupt halt, and many people lived in fear of losing their businesses. The pandemic rattled the global economy unlike anything since the Great Depression, with unemployment jumping to nearly 15%.
Pandemic lockdowns devastated many industries and threw others into total chaos. And while the merchant cash advance (MCA) industry was no exception, the industry (and its stakeholders) demonstrated a remarkable ability to adapt.
A Catastrophic Shock for the MCA Industry
As the pandemic took hold, MCA funders and brokers saw repayment and demand for funding crater, as consumers stopped buying and businesses stopped selling.
By the end of March 2020, payments from merchants decreased by 20% to 30%, or even more depending on the business vertical.
Since a merchant cash advance is an agreement to purchase future revenue, when sales dropped practically to zero, both merchants and MCA funders were launched into uncharted territory.
A few insolvent enterprises can’t repay? That’s the normal cost of doing business for an MCA provider. All your clients are paying a fraction of what they owe? That’s a recipe for disaster.
As a result, MCA funders adopted far more conservative standards for prospective clients, as the current ones who had been repaying at a healthy rate stopped almost altogether. The likelihood of repayment had to be evaluated on very different standards than before the lockdowns.
The MCA Industry Rolled With the Punches
MCA providers are nothing if not savvy business operators with an eye for creative problem-solving. And in the face of (enormous) adversity, the MCA industry as a whole still found ways to support their clients and maintain a viable funding model.
This is how they did it.
1) Adapting Payment Structures
MCA companies prioritized fairness. Recognizing the plight of merchants, many funders reassessed and paused ACH payments for those seeing reduced or zero revenue.
Funders took proactive steps, such as introducing payment deferrals, offering percentage reductions on sales remitted, and decreasing payback amounts.
The priority was to keep merchants afloat, and find a mutually beneficial arrangement that honored the intent of the original agreement.
Ethics and integrity had a “rubber meets the road” moment.
Many in the MCA industry understood that if an enterprise closed due to the pandemic, MCA repayments shouldn’t be demanded, even if contracts suggested otherwise. Some MCA funders didn’t pass this test very well and the publicity from their behavior reflected poorly on the industry as a whole.
MCA funders had to walk a thin line between demanding repayment from people with no ability to pay and operating with ruinous generosity.
2) Re-Evaluating Contractual Terms
The pandemic prompted many funders to re-evaluate their financial agreements with clients.
MCA providers were urged not to view merchants who accessed government aid as defaulters. It became imperative to clarify that MCA contracts were designed to buy future receivables, not government benefits. Thus, government aid wouldn’t factor into revenue calculations.
Moreover, with increased scrutiny, the MCA industry was warned against dubious practices. Legal risks loomed, and the importance of ethical funding and collections was emphasized.
This issue also had legal ramifications due to the distinction between a “loan” and an “agreement to purchase revenue.” Although every MCA funder wanted to be repaid, just like a bank, MCA funders needed to tread carefully to avoid their agreements being reclassified as loans.
3) Embracing Open Communication With Merchants
More than ever, transparency became crucial for successful client-funder relationships. By fostering open dialogue, MCA firms built trust with their clients and discovered the harsh realities these small enterprises were facing on a daily basis.
Healthy, open communication opened the door to tailored solutions for merchants. And it helped MCA funders keep repeat customers.
In some cases, this included connecting merchants with Paycheck Protection Program (PPP) loans and other forms of SBA support such as the Economic Injury Disaster Loan (EIDL) Advance Program.
Lessons Learned for the Road Ahead
There’s no way of knowing what the future holds, and what new adversity the MCA industry will face. What we can guarantee is that flexibility and resilience will continue to be the hallmark traits of MCA funders who weather harsh storms.
Initiatives like the U.S. Government’s PPP proved invaluable in bridging the gap while people and the economy adapted to the “new normal.”
Alternative lenders showcased their efficiency, often outpacing large commercial banks in serving smaller enterprises. After all, small enterprises are the bedrock of our economy, and providing aid for them was definitely the right choice.
Many industries were forced to digitize their operations to stay afloat while working remotely. For MCA funders with outstanding advances during the pandemic’s onset, lending software such as Onyx IQ were essential for managing portfolios—and have proven to be a new normal for alternative lenders.
Thanks to the willingness of MCA firms to pivot and adopt a “win-win” approach, the industry is poised for growth.
More and more businesses have digital sales channels that allow them to generate revenue with or without a physical storefront. That means that even if a new crisis led to new lockdowns, many businesses would barely see a blip in their sales.
And MCA funders have the technology and flexibility to back them up.
Stronger, Smarter, and Equipped With Better Tech
The COVID-19 pandemic was the sort of event that most people only see once in a lifetime, and it taught the MCA industry valuable lessons, mainly that alternative funding is about helping small enterprise owners break through challenges and build sustainable operations.
MCA firms with strong values and integrity will see long-term success in this industry, while the people trying to make a quick buck will likely wash out. After all, good business for a customer is good business for an MCA funder.
Onyx IQ is a loan origination and servicing platform that helps funders manage their portfolios and streamline their processes. It gives you the power to customize individual deals and identify large-scale trends.
If you’re looking to build a more resilient, streamlined MCA operation, Onyx IQ is what you need. Don’t wait for another pandemic to hit to adopt the technology your operation needs. Schedule a demo with Onyx IQ today, and find out for yourself.
