Rising interest rates, stubborn inflation, international conflicts, and a lopsided job market have many people worrying about what’s coming next. And small to medium-sized enterprises (SMEs) are looking for more funding than ever.
For funders in the alternative lending space, such as those offering merchant cash advances (MCAs), it’s a perfect time to assess and optimize your pricing strategy—you need it to be robust and flexible.
You’re not only working to close deals—it’s also about staying ahead of the competition.
If you’re carrying the stress of instability, remember that periods of economic uncertainty are also periods of opportunity. By tuning your MCA pricing strategy, you can improve the profitability of your funding operation and increase your resilience to volatile, and even harsh, economic weather.
In this article, we’ll go over factors that should inform your pricing, and strategies to keep it alive and competitive.
Market Winds That Affect MCA Pricing
As an MCA funder, you most likely have a method that you use to determine pricing—you might rely on anything from gut feeling to hard numbers.
But no business is an island: whichever your current method, you can’t deny or exclude outside factors. Which are the factors that should affect your MCA pricing?
1. National and Regional Economic Health
Discussions around the economy usually center on national numbers, but you shouldn’t overlook how the economy in your operating region is doing.
When the economy contracts, SME sales slow down, and merchants pay less on their MCA balance. Conversely, when sales are high, repayments accelerate.
Spend time analyzing economic trends, and model how these fluctuations will affect your profitability. Then, consider how you should change your MCA pricing formula in response to trends if they stay the same, intensify, or decrease.
You can’t control how the market winds will blow, but you can adjust your sails accordingly.
2. Industry Risk
Although all industries have their own set of risks, some are undeniably riskier than others.
That’s why it’s important to analyze your client and national data for specific industries and develop a risk score to use as a baseline.
Maybe you have reason to believe that a specific client is highly likely to repay. Still, if they’re part of a high-risk industry such as multi-level marketing, adult entertainment, or cannabis, it’s good to set prices and expectations appropriately.
3. Regulator Risk
As the alternative financing and merchant cash advance industries have grown, so has public scrutiny.
As a result, many states have enacted regulations for funders who offer merchant cash advances. While regulation can help protect consumers from unethical operators and predatory practices, it can also increase the burden on funders doing things the right way.
Whatever the regulations in your operating state(s) are, it’s important to review them, understand how much they cost your operations, and adjust your MCA pricing accordingly.
4. Interest Rates
The Federal Reserve has steadily cranked up interest rates to fight inflation.
Although this doesn’t directly affect MCA pricing—as most funders set their prices independently of the rates—it does affect the merchant cash advance industry as a whole. Higher interest rates will push more SMEs away from traditional financing, and encourage them to examine alternative financing to meet their cash flow needs.
The Best MCA Pricing Model Is a Dynamic One
If you’ve taken a “set it and forget it” approach to MCA pricing, you’re leaving money on the table, or exposing your business to unnecessary risk. Instead, you should develop a dynamic pricing model that allows you to adjust for various factors.
In addition to the four macro trends discussed above, it’s helpful to incorporate the following criteria in your pricing model.
1. Segmentation
Creating revenue tiers is a great way to segment prospective MCA customers With that information, you can get a clear idea of how to price your MCA offering.
You can also segment by location and length of time in business. If you have historical data to analyze, you may find that certain segments are more successful or profitable when taking an MCA. Use this information to tune your pricing model.
2. Mutual Benefit
Some MCA funders focus on the quick payday and less on the MCA customer’s ability to pay and continue growing the business. In other words, they care only about instant profit, and don’t take time to understand their customers’ real needs.
Hitting the sweet spot requires professional experience and a commitment to taking the customer’s best interests to heart. Instead of stuffing money down a customer’s throat, find the right pricing and conditions to set them up for success.
Over the long term, the more successful repayments you can facilitate, the more your business will grow. At the end of the day, it’s about taking a win-win approach.
3. Competition Pricing
Discovering what other MCA funders and brokers are charging may not be easy, but every detail you can gather is important.
Prospects shop for the best MCA rate. If a competitor is undercutting your pricing, that might play to your favor, especially if you can explain the methodology behind your pricing.
Customers pay for value, so it’s in your best interest to explain why your pricing is structured the way it is and how that structure benefits the client.
You don’t want to win a race to the bottom of the pricing barrel—you want to demonstrate to your customers why taking an MCA with you is the best value for them.
Harness Data for Informed MCA Pricing
Flying by the seat of your pants is great if you care more about the occasional instant profit than future success.
Incorporating comprehensive data is the best way to move your company forward efficiently and profitably. If you’ve collected robust data on your existing clients, you can analyze it to identify ways to improve your pricing model or adjust your business processes for better results.
With the right data, and the right resources to interpret that data, you gain:
- Understanding of your customer’s financial health: detailed analytics can take you beyond credit scores, into a comprehensive view of customers’ financial situations.
- Real-time decision making: spreadsheets are helpful but limited. A robust platform allows you to set thresholds, flag specific metrics, and decide instantly.
- Improved customer satisfaction: faster, more informed funding decisions mean customers can get their money faster or understand why their application was denied. The customer experience is fundamental to your funding operation.
- Tighter security: funders know they’re also at risk of being taken advantage of by SMEs that lie about their numbers or refuse to pay. The right analytics platform can help you navigate KYC/AML requirements and help protect your operation from unnecessary risk.
Ultimately, leveraging data in all its possible forms helps you to make more informed decisions when it comes to MCA pricing. It allows you to interpret external factors in a more accurate way, but it also helps you understand your own customers’ trends.
The better you understand external and internal trends, the better prepared you are to make fast and effective decisions.
But raw data isn’t enough: you need a capable team, and a powerful tool that allows you to make changes to your strategy in a matter of minutes.
Optimizing Your Pricing Pays off Now and Later
There are many facets to consider when evaluating your pricing strategy. And although it can feel daunting, there’s no need to reinvent the wheel.
The reasons for optimizing your pricing speak for themselves:
- Competitive advantage.
- Lower risk.
- Better relationship with customers.
- Long-term profitability.
- Resilience to economic volatility.
It may seem like all this effort is unnecessary when so many SMEs turn to alternative financing. After all, customers will be pouring in regardless, right? Wrong.
Many SMEs are in need of financing, but competition is also growing fierce in the merchant cash advance space. If you just slap a price on your products, don’t expect to grow.
You need to be aware of what changes, how it changes, what customers need, and you also need to adjust your pricing accordingly. You will gain a lot, and you will improve your profit in the long run.
A Finely Tuned Pricing Strategy Needs the Right Platform
Competition in the lending space is heating up.
By optimizing your MCA pricing, you can build a strong foundation that allows you to focus on other aspects of your business and outlast the operators who are only in it to make a quick buck.
The Onyx IQ loan management platform is the powerful partner you need to keep your pricing strategy flexible and robust.
You can use Onyx IQ to build advanced pricing models and create new efficiencies for your team. Request a demo to discover how Onyx can help you upgrade your business.
