Is a Merchant Cash Advance Bubble Coming?

Is a Merchant Cash Advance

Is a Merchant Cash Advance Bubble Coming?

We all know small business bank loans have dried up and are extremely difficult to obtain since the Great Recession of 2008. Small business has become increasingly desperate to find short-term cash-flow solutions. Because of their ease of getting and losing credit requirements, Merchant Cash Advance (MCA) & ACH lenders have stepped in and have filled the demand.

Merchant Cash Advance (MCA) & ACH Lenders

These types of loans have been very profitable for lenders. Wall Street has funneled billions of dollars into the products because of high yields in a low yield environment. As a result, new merchant cash advance lenders are cropping up almost daily saturating the marketing place.  Many of these lenders are not profitable, and loan losses are enormous — a word of warning for brokers. You might be making a commission now, but very soon you may be seeing your cash flow evaporate as quickly as it came.

With the limited funding options available for U.S. small businesses, we are seeing an increased number of entrepreneurs using MCAs for more than just a short-term cash crunch. Very similar to payday loans for consumers, this type of loan does not solve long-term cash-flow solutions.  A big reason is a hefty price to pay. Entrepreneurs are paying around 60-150% by the time an MCA is paid off!

Small Businesses and MCA

Small businesses are trapped relying on these loans. At the same time, lenders are not mitigating risk and are focusing on quantity vs. the quality of the borrower. With the increased lending to risky borrowers, we are starting to see an increase in defaults. As defaults begin to become more prevalent, a dramatic decline of MCA’s availability will occur. Investors will no longer see MCAs as being viable. Companies that became reliant on these loans will default in mass, and the cycle of collapse will be complete. This type of bust will be very similar to what happened in the sub-prime mortgage industry.

To make matters worse for MCA resellers, many lenders require brokers to take partial liability on loans they arrange. This makes the pending bubble particularly painful for brokers. The excellent news for MCA resellers and brokers is there are profitable, less risky long-term lending solutions for small businesses. Factoring companies such as Paragon Financial have a two-decade-long presence in small business funding working to cultivate, educate, and support their brokers. Paragon offers brokers long-term financial security.

MCA leaders are creating a potential disaster for you as a broker. Paragon Financial’s broker program gives you options MCA’s do not offer. We offer credit protection with every factoring program; we can fund companies with tax issues, client concentration issues, and select startups. Paragon knows how to mitigate risk, and we are in this long-term.

Diversify out of the merchant cash advance business now before it’s too late.

Want to discuss more on our broker programs?

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