Merchant Cash Advance Investing or MCA is a commonly utilized type of loan for small businesses who either don’t qualify or simply cannot obtain a sizable enough loan from a bank. Generally speaking, MCA loans come with stipulations; higher interest rates, and specific ways that the merchant pays the loan back. In fact, most of the time they aren’t even referred to as loans by their traditional definition. We’re using the term MCA loans in this article for ease of reference. Think of it more as an investment in future performance of the business who received the advance. One that can be paid back over time as the merchant conducts it’s business transactions.
How Does One Make a Merchant Cash Advance Investment?
With the continued rise in the digitization of our financial system, there are actually several different ways we as retail investors can partake in MCAs. Who wouldn’t want to get into merchant cash advance investing?
This type of investing and way of doing business is a new one for me. In fact, I’d bet it’s probably a new way of funding a business quickly for most people.
We’re always looking for new ways to invest right? The easiest way to do so is obviously to buy shares of fintech companies that provide MCAs to small and medium-sized businesses. You can also become a “purchaser” at some companies, which gives you a contract term where your capital is allocated to a businesses that are in need of an “advance”. As these advances are paid back, you are paid a passive return.
First, lets talk about some of the largest names in the fintech industry are in this business in one way or another. In fact, some of them also happen to be some of our favorite stocks to trade!
Let’s take a look at who operates in some of it’s business in merchant cash advances.
Shopify (NYSE: SHOP)
If you’ve been paying attention to the stock market at all over the past few years, you’ll already know that Shopify has quickly become one of the top-performing tech stocks in recent memory. The Canadian eCommerce company operates a lending division called Shopify Capital.
They offer merchant cash advance investing in the amount of $200 to $500,000 CDN for Canadian businesses and $200 to $1,000,000 USD for American businesses. Shopify is the preferred small business platform with well over one million small and medium-sized businesses using their services across more than 175 countries around the world.
Shopify’s stock may seem a little daunting as it currently trades at around $1,200 per share at the time of this writing. But there are few companies positioned as well as Shopify to continue to dominate the sector they’re in.
Square (NYSE: SQ)
Another very popular stock on FinTwit and Reddit, Square has made its reputation as the fintech company that appeals to the younger generation. It started as a way for small businesses to charge customers and accept payments via credit card when swiped through the square-shaped reader.
As a result, Square has truly become a pioneer in the digital transformation of the financial sector. You’ve probably paid for a service or item using Square at some point. It’s a pretty popular payment system. And it’s portable. Which makes it great for many small businesses trying to gain traction.
Its CashApp is one of the most popular ways to transfer money. And the company introduced the ability to buy and sell stocks as well as cryptocurrencies last year.
But did you know Square also has a merchant and small business lending arm through its Square Capital services? If you’re already a registered Square Seller, you have access to merchant cash advance from between $300 to $250,000.
But the one stipulation is that merchants must pay the advance back in full within 18 months. So merchant cash advance investing isn’t like getting free money. Wouldn’t free money be nice though?
PayPal (NASDAQ: PYPL)
Yet another very popular fintech stock, PayPal is generally thought of as the pioneer of digital payments and with over 360 million users worldwide. It’s one of the near-universally accepted ways of transferring money electronically. Very similar to Square, if you’re a PayPal Business member, then you qualify for PayPal Working Capital.
This can net you up to $97,000 for your first advance, and up to $300,000 for future ones. As with the other companies, PayPal Working Capital is the best option if you’re already integrated into the PayPal ecosystem. So PayPal stock shares might be a nice company to look closer at which gives you some merchant cash advance exposure.
Is Merchant Cash Advance a Good Business?
A merchant cash advance is a great option for small or medium businesses to get funded ASAP. You won’t have to jump through the hoops that banks make you go through. However, you will have to pay this MCA back, and typically in under 18 months. If you have a high volume of sales, you can pay it back through a percentage of that.
For example, a common way to repay the loan is by funneling a percentage of your credit card or debit card sales, so that it’s directly tied to how well the business is doing. These MCA advances (like a loan) are less affected by the rigidity of the rules of bank lending. As a result, businesses have been getting creative on both sides of the deal.
Some Lesser Known Options for Merchant Cash Advance Investing
Stripe: Stripe will probably be joining those other companies on Wall Street as a publicly-traded company at some point this year. While Stripe was founded in Silicon Valley it actually splits its operations between the United States and Ireland; with a head office in Dublin. Stripe Capital has partnered with Funding Circle to provide merchants with advances of up to $500,000.
Kabbage: Kabbage deals specifically in lending money to small businesses via a line of credit rather than a traditional MCA. The company is based out of Atlanta, Georgia. They use an automated lending platform to help support small business owners which utilizes direct bank transfers or other platforms including PayPal.
SoFi: Another company that’s being brought public by a SPAC IPO from venture capitalist Chamath Palihapitiya is SoFi. They’re one of the largest personal finance sites around. The name actually stands for Social Finance. And rather than specifically giving out MCAs, SoFi will run your information through their algorithm and provide a personal loan that can be used towards your business.
These merchant cash investing companies could be great to look into if you’re a new business or a savvy investor who just wants to get into the alternative finance space. Of, if you’re just traders like us, you can trade these companies in and out when they flip from bearish to bullish.
A New Way of MCA Investing
While most small business owners would probably prefer to go the MCA route for getting capital funding for their business, there’s a newer option that is gaining in popularity. Crowdfunding has become an incredibly savvy way of raising capital for your business or product.
In fact, it’s taken on multiple different forms around the internet. Most people have probably heard of sites like Kickstarter or GoFundMe. This allows users to market their product or business in order to get donations from people around the internet. These aren’t loans or MCAs. But do provide small businesses with an alternative way to raise capital.
Then there are sites like Fundable, SeedInvest, WeFunder, and Republic, which are specifically aimed at being able to invest in startups. Investors can feel free to put money towards a project or business that appeals to them. And oftentimes the return on investment is fairly reasonable. There’s always the risk that the company folds and is unsuccessful.
But some of these sites are great at supporting their investors by providing perks like dividends and interest, as well as individual perks from the startups themselves including free products. If you want to get into venture capitalism and either avoid the volatility of the stock market or simply to diversify your investment portfolio, then crowdfunding startups may be an option for you to pursue.
Being an Angel Investor
Here’s another term you may have heard of in the business world. Being an angel investor means you are providing capital to a startup and it can be via an MCA. However, in return, you also receive partial ownership of the company. This is becoming increasingly popular among retail investors.
The digitization of the financial world has allowed regular people to invest in things that only institutional investors used to be able to do. Again, there’s always an inherent risk with any investment. But if you know the business or startup you’re investing in, this can be an extremely profitable way to add another revenue stream to your portfolio.
Merchant Cash Advance Investing Conclusion
Merchant cash advance investing has become quite popular as of late. Why? Because it is often crucial to the survival and long-term success of a small business or startup. Traditionally, small business owners would apply for a business loan from a financial institution like a bank. But there are times when the deck may be stacked against them.
Whether they’re newly immigrated to the country, or just happen to have a bad credit score, banks are notoriously difficult to deal with when it comes to handing out loans. Merchant cash advances are a great way to solve this problem. On the flip side, MCA’s have become quite popular to participate in as a form of passive income. Because the margins are so high when a business receives an MCA, the person or entity on the other side does quite well when the merchant pays off the contract. Some companies are providing an opportunity, similar to crowd funding where you can participate in their PFR (purchase future receivables) programs. When you participate, your funds are matched with businesses who want advances. As the business pays it back, you receive a passive return.
Retail investors can now diversify their portfolios by adding venture capitalist and “MCA investor” to their resumes. While it isn’t always an ideal situation for the merchant, MCA investing is becoming a popular way for investors to avoid the volatility of the stock market. While at the same time helping out a small business that may not otherwise be able to operate if it weren’t for the funding.