If you are a lender who specializes in merchant cash advances, today’s post from The Rules of Thumb blog from MoneyThumb is written with you in mind. In the following post, we will discuss the history of the merchant cash advance industry, strides that have been made, and where the industry is headed in the future.
The Very First Merchant Cash Advance
The story of the truly first ever merchant cash advance is quite fascinating! We found this tidbit at Nerd Wallet, “In the late 1990s, Barbara Johnson was running four Gymboree Playgroup & Music franchises. Unable to get working capital to fund a summer marketing campaign, she wondered whether she could borrow against future credit card sales from parents bringing their kids back for fall classes. Johnson and her husband, Gary, co-founded Advance Me — the original name of CAN Capital — in 1998 and patented the technology that allowed the splitting of credit card sales. “She realized the great asset she had in hand was future receivables — a predictable revenue stream from folks who wanted to place their kids in Gymboree,” says Dan DeMeo, the current CEO of CAN Capital.”
Pretty cool, huh? The merchant cash advance industry has gone through many changes since that original loan situation. Just a few years ago there were a little above hundred merchant advance alternative lenders in the country. However, the immense success which the pioneer merchant cash advance investors experienced encouraged others to delve into the alternative financing industry proper. As of now, there are way more than one thousand merchant vendors spread across different towns and cities in the United States. Merchant cash advances now generate $5 billion to $10 billion in loans each year, industry officials estimate.
The Future of the Merchant Cash Advance Industry
The merchant cash advance industry has been evolving gradually. Whereas at one point, only businesses that accepted credit and debit card payments were eligible for a merchant advance. In recent times, businesses that utilize ACH have become eligible for advances as well. This alone has opened a whole new chapter in the history of merchant cash advance since several thousands of small business owners that did not qualify for merchant cash advances are now turning to merchant vendors.
As the merchant cash advance industry matures, lenders continue to find ways to provide financing to cash-strapped businesses. One of the more notable examples is a recent partnership between Airbnb, the global home rental giant, and AirAdvance, which provides Airbnb hosts with access to funds advanced against future bookings. Airbnb isn’t the only digital giant getting into the merchant cash advance game. Shopify, one of the leading e-commerce platforms in the world established Shopify Capital in 2016 to help online retail customers procure financing. According to their 3rd quarter 2018 earnings report, “ Shopify Capital issued $76.4 million in merchant cash advances in the third quarter of 2018, an increase of 73% versus the $44.1 million issued in the third quarter of last year. Shopify Capital has grown to nearly $375 million in cumulative cash advanced since its launch.”
A recent article in Tech Crunch indicated that Stripe, one of the fastest growing online payment processors, is also considering adding merchant cash advances to its offerings, following in the footsteps of competitors Square and PayPal. According to the article, “Issuing business loans, in that regard, also would help Stripe compete better against the rest of the payments and financial services pack, including other tech-first companies like Square and PayPal, more established payment and credit firms like American Express, and of course traditional banks.” According to Tech Crunch, Square Capital “facilitated over 60,000 business loans totaling $390 million, up 22 percent year over year.”
It’s important to remember that this is still a fledgling industry. Over the next decade, the merchant cash advance industry will continue to refine and mature and regulators will begin to get a deeper hold on the market.