The Influence of Economic Downturns on the Merchant Cash Advance Industry

Jason Hunt
November 4, 2023

When you’re running a thriving business with a looming threat of a recession, you’ll need to be ready with some answers; what will you do when there’s an economic downturns and Merchant Cash Advance, how will you keep your business afloat during those times?

Economic downturns are unpredictable for the most part, and businesses need to be prepared for the upcoming turmoil.

Economic crisis brings about a sudden rise in interest rates when procuring loans from banks, but this is when MCA outshines traditional bank loans with its low factor rates.

Here, we aim to provide a clear picture of MCA rates during recessions, and how you can make the best of the situation.

The Current Recession & MCA

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You are probably aware of the 2022 recession that is coming in waves, impeding growth for businesses as stated by a recent KPMG survey with over 73% of CEOs of successful companies agreeing with the statement.

The recession is set to get worse, and banks are likely to hold back loan approvals for risk mitigation, this is where MCA lenders are likely to shine. However, the question of factor rates looms in the distance.

Merchant Cash Advance: A Quick Overview

Merchant cash advance has been a staple for businesses to garner success and growth at all times. Due to their flexible and quick funding options, it makes for an excellent pick for businesses that have issues with collateral, and low credit scores.

The repayment system is simple and easy, allowing businesses to pay back the loan over time through a percentage of their daily sales. All these features, with a fee, make it all worthwhile.

Most of this funding goes to businesses that are involved with day-to-day transactions, and a recession hitting them would most probably cripple the economy. Banks are refusing to pay out loans and the best option out there for these businesses is MCA.

However, things are a little different when there are economic circumstances at play, changing the role, structure, and appeal of MCA for businesses.

The Effect of Economic Downturns on Business

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When periods of recession or economic downturns are in play, business organizations experience an unexpected dip in sales revenue, leaving their future hanging in the balance.

This decrease in the flow of cash often gets a negative reaction from banks, since they are more likely to look into risk management, turning away loan requests from successful merchants with an excellent credit score.

However, MCA lenders function differently. Where banks see risks, MCA recognizes the opportunity. With uncertain cash flows, MCA lenders can calibrate repayments with flexibility.

Also, unusually, MCA doesn’t really look into credit scores, since their own income looks at recession as an opportunity, and inflation as a threat.

Let’s find out what these modifications in MCA factor rates usually include, and be better prepared for economic downturns that could otherwise threaten your business.

Increasing MCA Rates

It might seem counterintuitive for MCA rates to rise in a downturn in the economy. After all, higher rates may make it harder for businesses already struggling with declining revenue to make repayments. But at this point, it’s critical to comprehend how MCA providers manage their risk.

The risk connected to the advance is reflected in the factor rate of an MCA. It is determined by the estimated probability that the business won’t be able to pay back the advance.

The likelihood of financial difficulty for businesses increases during economic downturns. MCA providers then assess a higher level of risk and raise their rates to account for it.

However, with banks refusing to fund even successful businesses, MCA lenders are willing to take that risk, and the possibility of funding exists, even if the factor rates are high.

The Impact on Businesses

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For businesses, the change in MCA rates during economic downturns has a significant impact. An MCA is a crucial source of funding for many startups and small businesses, especially when other financing options are harder to access.

However, with rising interest rates, the cost of financing through an MCA may make it more difficult for businesses to manage their finances.

Therefore, during times of economic downturn, it is crucial for businesses to understand the potential impact of these changes and adjust their financing plans accordingly.

Strategies for Businesses

Businesses can develop strategies to negotiate the difficult environment by understanding the relationship between economic downturns and Merchant Cash Advance rates.

Businesses could bargain with the MCA provider to get a better factor rate or holdback percentage (the portion of daily credit card sales set aside for MCA repayment).

They might also look into alternative forms of financing, such as traditional loans, credit lines, or equity financing, which could provide better terms during economic downturns.

Businesses can also benefit from these times by speaking with financial advisors to better understand their options.

Conclusion

Although complicated, the link between economic downturns and MCA rates can be understood. Businesses that are aware of these dynamics are better able to prevent negative effects.

Businesses can successfully navigate economic downturns and manage their financing even in the face of rising MCA rates with proper planning and strategic decision-making.

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Jason Hunt

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