Become an Onyx IQ Insider. Subscribe to our Newsletter Today

Subscribe to our Newsletter Today

Financing Freelancers: MCAs and the Gig Economy

Gig workers, freelancers, independent contractors, temporary workers. 

However you refer to this type of working professional, they’re a force of millions (and growing) collectively known as the “gig economy.”

But there’s a problem: traditional lenders have yet to meet, let alone understand, the unique financial needs of gig workers.

On the positive side, the gig economy represents a great opportunity for the merchant cash advance and alternative lending industry to step in and take the lead. 

In this article, we’ll delve into the gig economy, and explore the lending opportunities it presents for MCA providers, focusing on funding for gig workers who operate as limited liability companies (LLC). 

Defining the Gig Economy

From construction workers to writers, fishermen to web designers, management consultants to computer coders: freelancers are active in a wide range of industries. 

In fact, more than one-third of U.S. workers are considered freelancers or independent workers. And those numbers continue to rise as technology advances, the economy evolves, and attitudes towards work change. 

That said, it’s also critical to note that each gig worker is unique and doesn’t necessarily fit into a standard definition:

  • Although they vary in age, gender, and background, they are often younger than traditional workers, slightly more educated, and more likely to live in urban areas.
  • One in  ten rely on gig work as their primary income, while others use gig work to supplement other income. 
  • Some have established LLCs for billing—which comes with a range of benefits—while others work as regular individuals.

In other words, the gig workforce is not a homogenous group, and MCA providers must keep these differences in mind when offering solutions. 

The Financial Needs of Gig Workers

People turn to gig work for many different reasons. To pay the bills, get through rough financial times, or simply save some extra cash.

Motivations differ, but one thing’s for sure: freelancers’ biggest challenge is inconsistent earnings. Many gig workers have irregular income streams or face seasonal fluctuations in their revenue, which can create occasional cash flow problems. 

As such, when money is tight or business is slowing down, freelancers may approach lenders for a quick infusion of cash. But unfortunately, many get denied, even when they can repay.

What’s the reason behind this?

Traditional lenders really don’t know what to make of gig workers’ income. Credit scores are no good to measure creditworthiness, and lenders lack a standard for income verification that applies to workers without traditional pay stubs or business structure. 

When funding is denied, it’s not just a freelancer’s business that gets affected. The same study linked above showed that many workers who knew they could repay funding, and still got rejected, experienced negative mental health effects—and saw a negative impact on their families.

The merchant cash advance industry can become the driving force to turn this around for gig workers.

MCA Providers: Pros of Targeting the Gig Economy 

Merchant cash advance providers can empower gig workers by bridging the current financing gap and helping them unlock new opportunities for success.

Here are a few advantages that MCA providers can find in gig economy lending.

Growing Market

More and more, we’re seeing people hop on the freelance train.

In 2020 alone, the U.S. gig economy experienced a 33% growth. Even post-pandemic, most freelancers foresee that they’ll keep doing gig work in the future.

Meanwhile, by 2027, more than half of the U.S. workforce will likely be part of the gig economy. This represents a massive—and continuously growing—market of professionals who can benefit from MCA services. 

Less Competition From Banks

Unlike traditional lenders who heavily consider credit history, MCA providers typically focus on a business’ sales and future revenue potential.

This makes it easier for gig workers to qualify for an MCA—even if they have limited credit history, lower credit scores, or have only recently incorporated their LLC.

By catering to the gig economy, MCA providers can tap into a market segment that often struggles to meet the strict credit requirements of traditional loans, thereby creating abundant opportunities for growing MCA profits.

Potential for Repeat Business

Gig workers’ earnings can fluctuate substantially.

By establishing relationships with freelancers using the LLC structure, alternative lenders can potentially secure repeat business and build long-term partnerships—especially as gig workers look for cash flow to cover periods of low demand.

This can result in a steady stream of clients and revenue for MCA providers.

MCA Providers: Cons of Targeting the Gig Economy 

Focusing on gig economy lending  comes with a lot of opportunities for merchant cash advance providers.

However, there are some potential hurdles to consider when financing this segment.

Slower Repayments

With a cash advance, repayment terms typically take into consideration a business’ future projected revenue. Gig workers’ revenue can fluctuate significantly from one month to another, or even from one week to another. So if they go through a rough patch with low income, they might struggle to meet advance repayments.

Potential for Higher Default Rates

When compared to funding merchants with regular income streams, MCA providers undoubtedly take on some additional risk when funding freelancers. This is not necessarily because gig workers are unreliable—rather, their income patterns can be irregular.

Limited Borrowing Capacity

Unfortunately, freelancers’ revenue is often limited, and their financial stability may make it harder for MCA providers to provide higher cash advance amounts. This limitation can restrict growth potential and revenue opportunities for MCA providers

Navigating the Gig Economy: Five Key Considerations for MCA Providers

To effectively serve the gig economy, MCA providers should consider the following strategies. 

1. Understand the Gig Economy

Because the gig economy is ever-evolving, it’s critical to stay atop industry trends

Fundamentally, begin by making sure to understand the key differences between LLCs, general partnerships, sole proprietorships, etc., as funding eligibility may vary for each structure.

Meanwhile, be mindful of the varied experiences of this segment. This will enable you to better tailor products and services that meet the unique needs and challenges faced by gig workers.

2. Offer Flexible Products

In contrast to larger businesses, gig workers often need smaller dollar amounts.

Design your merchant cash advances to cater to the specific financial needs of this market segment. This will enable gig workers to access the capital they need, without being burdened by larger funding amounts they may not require.

Be sure to take into consideration their income patterns and provide a degree of flexibility in the repayment terms. 

3. Leverage Alternative Data

Put simply, traditional credit scores alone do not paint an accurate picture of one’s creditworthiness or repayment capacity.

Instead, integrate non-traditional data sources into your underwriting and risk assessment model. Consider sources such as cash flow and transaction history, utility service payments, and even their social media presence.

This will help you make more accurate decisions, and ultimately help provide capital to underserved and underbanked segments of the population.

4. Provide Financial Education and Support

Many gig workers have above-average levels of financial literacy. But not all have the know-how for managing their cash flow effectively.

To bridge that gap, consider offering educational resources, workshops or webinars to help gig workers understand their MCA responsibilities.

Topics may include budgeting, cash flow management, and financial planning—helping them make better informed short-term decisions, while also improving their long-term financial health.

How Agile Lending Technology Can Help

Technology can be a game-changer when it comes to risk assessment.

An automated loan management software like Onyx IQ can help MCA providers better evaluate and assess the level of risk that gig workers may pose.

Real-time data and advanced analytics can help MCA providers make more informed decisions, swiftly and accurately. Powerful platforms like this can even automate credit scoring based on custom decision engines.

All this leads to a holistic risk evaluation process—one where merchant cash advance providers save time and resources.

As an added benefit, a SaaS lending platform also makes it a breeze for gig workers to apply for funding, submit necessary documents, and sign paperwork.

In a nutshell, agile lending technology is all about streamlining processes, creating an overall smooth funding experience for gig workers, and broadening the horizon for alternative lenders.

Onyx IQ: Helping MCA Providers Scale

The gig economy is booming. And as traditional lenders continue to overlook the unique financial needs of freelancers,  MCA providers have an opportunity to shine.

Through gig economy lending, MCA providers can tap into a growing market, offer flexible funding, and build long-term partnerships with gig workers.

An all-in-one digital lending platform like Onyx IQ can help you reach this exciting market segment.  

Ready to unlock the gig economy’s potential? Request an Onyx IQ demo, and learn what it’s all about.

Share article:

Become an Onyx IQ Insider!

Stay current with monthly recaps of today’s alternative lending news from our industry experts.