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A Brief History of the Merchant Cash Advance Industry

A pile of one-hundred-dollar bills.

In today’s article, we’re going to embark on a journey back in time, through the annals of the merchant cash advance (MCA) industry, including its origin, innovators, and milestones.

At Onyx IQ, we are strong believers in the adage that to know where you’re going, you need to know where you’ve come from. As such, understanding the industry’s history and evolution can help MCA providers better navigate the present and shape the future.

As we traverse the remarkable journey of the MCA industry from its inception to its current state, we will also take a look at some current merchant cash advance trends that funders should keep tabs on.  

The History of the Merchant Cash Advance

The birth of the MCA can be traced back to a savvy business owner named Barbara Johnson.

Back in the late 1990s, Barbara was running multiple children play place franchises and needed funds for a summer marketing campaign. That’s when her lightbulb moment happened: she’d use future credit card transactions (for upcoming fall classes) to secure financing.

Building on this idea, in 1997 Barbara and her husband Gary scored a patent for the technology that allowed to secure debt using future credit card receivables—a cornerstone of MCA. With it, they founded AdvanceMe. 

Over the next few years, AdvanceMe (which later became CAN Capital) became the nation’s leading MCA provider, serving businesses in all 50 states. 

However, the Johnsons weren’t the only ones doing this kind of business.

The early 2000s saw the rise of many MCA providers, who increasingly became the go-to funding sources for small and medium-sized enterprises (SMEs), especially those businesses grappling with seasonal revenue ups and downs.

In 2007, AdvanceMe threw down the legal gauntlet, suing competitors like AmeriMerchant (now Capify) for patent violations. Had AdvanceMe won, they’d have held a monopoly…

However, the patent got axed. AdvanceMe appealed in 2008, but a federal appeals court upheld the initial ruling: no patent for MCAs.

With the patent out of the way, the MCA market opened its doors even wider to a new wave of eager funders.

The Great Recession of 2008: Crisis or Opportunity?

Put very mildly, the Great Recession hit banks hard.

It also served as a strong indicator that banks’ traditional lending standards hadn’t been stringent enough to prevent loan defaults.

So, as more and more businesses faced financial challenges, traditional lending institutions tightened their pockets. Some even stopped offering smaller loans altogether.

At this point, merchant cash advance funders stepped in. SMEs needed short-term funding for essential upgrades, expansions, and strategic campaigns—and MCAs offered a lifeline during those uncertain times.

While the recession was a crisis for some, it conversely helped to popularize the use of MCAs.

The industry has been on a major growth trajectory ever since, and is now a multi billion-dollar industry.

Recent Developments: Silicon Valley Gets Into the Game

While VC funds and major banks have had a presence in the MCA sector for some time, tech titans like Amazon, Shopify, and DoorDash have begun to introduce their unique variations of cash advance products to their own user bases.

In 2022, DoorDash launched DoorDash Capital, offering revenue-based financing to restaurants who use their platform.

Months later, Amazon Lending introduced their own MCA-type initiative to provide essential working capital to SMEs in the online marketplace.

But one of the most noteworthy Silicon Valley players is Shopify Capital.

Launched in 2016, they have already provided more than $4.7 billion in funding to merchants across the U.S., Canada, Australia, and the U.K.

And business continues to boom: from the last quarter of 2022, Shopify Capital has grown 21%,  as they provided $393 million in loans and merchant cash advances.

Where the MCA Industry Is Headed

So, what’s next for the MCA industry?

As we peer into the crystal ball of the industry’s future, several significant merchant cash advance trends seem to be emerging—each poised to reshape the landscape.

Increased Regulation

Although a 20+ year old industry, only now is the legislative system starting to catch up to MCAs.

This shows in the recent rise of state-level MCA regulations. Although it’s not happening everywhere just yet, a number of prominent states are leading the MCA regulation charge.

Why the sudden appearance of such rules?

Unlike traditional bank loans, MCAs don’t fall under federal government laws. With the global MCA market set to boom through 2028, state-level regulators in the U.S. are creating legislation to ensure SMEs get a fair deal.

While MCA regulations may vary geographically, their main goal remains the same: promote fairness so SMEs can make savvy financial choices.

This shifting regulatory landscape poses a challenge for MCA providers, as non-compliance can result in penalties in the thousands of dollars. And, if a merchant takes you to court? Well, depending on the jurisdiction, you could be looking at damages in the millions of dollars. To thrive, staying updated and fully compliant is a must.

Keep a close eye on alternative lending regulations and any new rules that might pop up—in each state that you work in. Prepare to adapt, quickly and accordingly. In the end, if you aren’t a bad actor, you shouldn’t have any problems. 

A Growing Focus on a “Win-Win” Approach to Funding

It’s no surprise that as the MCA industry grows, so does the competition.

More competition unfortunately means some MCA providers take a short-term approach to funding, knowingly overleveraging merchants and giving the industry a bad name.

The good news? This is where the “win-win” approach shines.

Trust is everything when it comes to MCAs, and funders who put merchants’ long-term prosperity front and center (aka, they aren’t overleveraging their clients) are experiencing benefits in spades.

For starters, this approach can reduce the risk of defaults. When merchants can manage their repayments, it’s good for everyone.

SMEs are then more likely to seek additional funding and recommend their MCA providers to others, creating a cycle of sustainable growth for all involved.

Moreover, as more MCA providers aim for a “win-win”, this shift will counter the bad actors while improving the reputation of the whole sector.

The Advent of Agile Funding Platforms

Digital transformation is not just a fancy term—it’s the engine driving alternative lending. And what’s under the hood? Why, it’s agile lending software.

More than a trend, MCA funders are taking lessons learned from the pandemic (i.e., agility = survival) and implementing modern lending platforms to more efficiently manage their operations. Benefits to this approach include:

  • Keep up with new MCA rules: agile software can be easily adjusted to align funding practices in accordance with the new rules and regulations. 
  • Compliance made easy: financial compliance shouldn’t mean mountains of paperwork. Agile lending software automates tasks like collecting data, reporting, and record-keeping, all while protecting sensitive data.
  • Robust due diligence: coordinating “win-win” deals relies on quick and informed decisions—and a modern lending platform with advanced decision engines helps you do just that.
  • Transparent communication: effective communication is the secret sauce to “win-win” deals—agile lending software ensures funders, brokers, and SMEs are all on the same page, at all times.

Ultimately, agile lending software is one of the most important factors (in our opinion, the most important) that sets MCA businesses apart in today’s competitive market.

The Future is Bright With Onyx IQ

MCAs have come a long way since the mid-90s. The industry was born, grew, and shows no signs of stopping.

The future looks promising for the MCA industry.

Yes, increasing MCA regulations will continue to be a challenge for MCA providers. However, the industry has shown an extraordinary ability to adapt and evolve even in the most difficult of times.

By adopting a “win-win” approach and embracing digital transformation, MCA funders will undoubtedly be better prepared to navigate all kinds of regulatory complexities, streamline operations, and enhance services for SMEs—today, and for years to come.

Onyx IQ’s state-of-the-art SaaS lending platform empowers MCA providers and alternative lenders to supercharge their businesses and easily adapt their processes in an ever-changing industry.

As we continue on this journey together, one question remains: how are you preparing for the future of MCA?

If you’re eager to stay ahead of industry trends, embrace innovation, and unlock the future of the MCA industry, schedule a demo of Onyx IQ today.

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