Forbes: Cash Advance Loans Are an Evolution of The Personal Loan System

Fintech companies that handle transactions on behalf of merchants, also known as merchant payment processors, felt the downstream effects of last year’s blow to small businesses. As retail foot traffic dried up and consumer budgets tightened in response to economic uncertainty, payment processors saw their service fees shrink accordingly.

The struggling marketplace put many merchant processors in a tenuous position when consumers either couldn’t, or wouldn’t, shop due to Covid-19 because service fees from processing payments were their only revenue stream. With the uncertain economic rebound keeping every business on its toes, merchant processors have two options: hope for an increase in sales volume or explore new sources of incremental revenue.

Facing a slower-than-anticipated vaccine rollout and continued lack of confidence among many consumers, it may be time to explore that second option — seeking additional growth opportunities.

The Market For Merchant Cash Advances

There’s a growing market for merchant cash advances that already includes digital behemoths like PayPal, Stripe, Amazon and others. On the other side of the table are small businesses, representing over 99% of all businesses in the U.S., which might not be receiving all the capital they need. According to the Federal Reserve, in 2018, more than half of small businesses that applied for funding received less than they asked for, a funding gap that only widened in the past year due to Covid-19. And even with more favorable terms in its second round, the Paycheck Protection Program might not be ideal for businesses that need cash quickly.

The Merchant Processor Advantage

Extending capital to small businesses can be a good growth opportunity for merchant processors, thanks to their existing relationships, insight into real-time business activity and integration with the merchants’ revenue stream. Existing customer relationships mean merchant processors can introduce a new service with minimal acquisition costs. There is already an infrastructure in place for disbursing the advance and for accepting repayments.

Those relationships also mean access to data. Whereas a traditional lender has to wait for a customer to apply for a loan before it gets insight into the health of that business, a merchant processor sees business activity in real time, enabling it to prescreen and preapprove customers for offers, which is a much more proactive approach with a higher customer acceptance rate.

Cash advances are also an important tool in customer retention efforts. Through the success of players like Square and Stripe, many small and medium-sized businesses have the expectation that they can access capital through their merchant processors.

So, how can a merchant processor begin to offer cash advances? Here are five steps for entering the marketplace:

1. Choose your digital lending solution. Your system is built for payment processing, not cash advances. But that doesn’t mean you have to overhaul your whole system to get started. To create a streamlined process for you and your merchants, look for a solution that offers end-to-end lending optimization. You’ll want to make sure the one you pick includes built-in preapprovals, a fully digitized application process (including e-signature capabilities) and the ability to disburse funds. A white-labeled solution will accomplish the loan application and processing using an interface and experience that are familiar to your current customers.

2. Prescreen customers to generate preapprovals. You’re already ahead of the competition when it comes to the cost of acquisition, startup investments and initial vetting of your merchants. Get in early with preapprovals before your customers go elsewhere. These relationships are ongoing, and as a small business grows, so will the amount of financing it needs to scale.

3. Deliver funds quickly (within 24 hours). Small businesses are looking for an advance because they’re strapped for cash now. They have an urgent need, and many expect a 24-hour turnaround. The advantage of a cash advance diminishes the longer the process takes.

4. Offer flexible repayment plans. To maximize the acceptance rate of preapproval offers, it’s key to offer options for how the advance is repaid. Offering fixed (flat fee) or revenue-based (as a percentage of sales) repayment plans provides maximum flexibility.

5. Make the repayment process simple. As a merchant processor, you already have a transaction system in place. Roll loan payments into that process, leveraging the fee structure you already have instead of creating a parallel payment method. You get paid faster, and it’s easier on your merchants.

The Covid-19 pandemic has caused businesses in every industry to scramble for new ways to innovate and survive. For some, it was a focus on e-commerce. For others, it was a massive overhaul of their supply chain. For merchant payment processors, it’s the realization that a single stream of revenue makes them excessively vulnerable. Moving into the merchant cash advance arena is a way to diversify without having to totally reinvent themselves.

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