Alternative Lenders Come Courting

Five key questions you should ask a potential strategic partner.

By Christine C. Chang

Today, established and reputable credit card and fintech players, such as American Express (offering merchant funding since 2011), PayPal (provided $3 billion in advances and loans to 115,000 small businesses since 2013) and many others are taking full advantage of the growing interest in the alternative lending space and opportunities to serve the small to mid-sized business market.

In the process, these new players are capturing market share away from banks, who in the aftermath of the 2007-2008 financial crisis have become more risk averse and not able to meet the capital needs of today’s SMBs, citing high transaction costs, reduced margins and increased regulations pushing them to hold more capital against business loans than consumer loans. That is why banks are increasingly looking to establish strategic partnerships with reputable providers of SMB financing solutions and to deepen their relationships with their customers, by offering them more products and services to in turn increase retention rates.

The latter point is important because according to Barlow Research, more than 25 percent of SMBs are currently at risk to switch to another bank, and the 2015 Small Business Credit Survey: Report on Employer Firms, produced by several Federal Reserve banks, shows that more than half (55 percent) of SMBs surveyed were either declined or received less than the requested capital amount.

Merchant Cash Advances Are an Established Option for SMBs Seeking Capital
So where is a SMB owner to turn when the need for capital arises to maintain cashflow, hire new employees, purchase new inventory or equipment, or grow the business when his/her bank isn’t equipped or willing to meet that demand? Fortunately, there are alternatives, and one specific industry has emerged to provide a solution through strategic partnerships with banks.

For the past 20-plus years, the merchant cash advance industry has established itself as a viable option for SMB owners seeking financing. MCA is now considered part of the mainstream along with other alternative forms of SMB financing. Over the course of the MCA industry’s history, many of the “bad actors” that tarnished its reputation in its early stages have since folded.

Why MCAs Are Attractive to SMBs
SMBs are attracted to MCAs for their short duration, speed of funding, easy application process and the fact that MCAs are not a loan. The old saying “time is money” is particularly apt when you are running a small business and need to act quickly when the situation demands it. In fact, according to Raddon Research, between 65 to 67 percent of SMBs say that a fast decision on funding is a major factor when choosing an MCA.

The urgency is heightened by the fact that the median SMB owner holds only 27 cash buffer days in reserve. Today, many MCA providers are prepared to make a decision on an application within just a few hours, and funding can occur between 24 to 48 hours from the time the application is first submitted.

SMBs turn to MCAs to help them deal with such commonplace but potentially significant issues as equipment breakdowns, staffing up for a new opportunity or damages caused by weather-related disasters. Here are just two examples of businesses that were turned away by traditional banks but were approved for an MCA funder:

  • A restaurant owner in upstate New York purchased her business in January 2017. Her request for a loan from a traditional bank to complete renovations on the building was declined due to the short amount of time in business. In December 2017, she was approved for an MCA of $36,000.
  • An automotive dealer in Phoenix has been in business for more than three years, but his industry is considered “risky” by traditional banks for loans other than those requested for floor-plan financing. In September 2017, he needed funds to purchase more vehicles to sell and was approved for an MCA of $200,000.

Whether it is an everyday business situation like the two cited above, an emergency or a potentially lucrative business opportunity requiring a cash infusion, an MCA is a flexible option for capital that does not lock a business owner into fixed monthly payments like a loan does. The term is flexible, but typically under 12 months, and the SMB can usually receive small amounts such as $5,000 or up to $500,000 with the range varying per MCA provider.

Banks and MCA Partnership Benefits
By partnering with an MCA provider, banks can respond to this “need for speed” by extending their product set for potential SMB customers who ordinarily would not qualify for funding through traditional underwriting. These partnerships also allow banks to retain their existing SMB customers without incurring additional costs and, in the process, provide opportunities to expand their fee-based income. A strategic partnership with a reputable MCA provider should not add compliance and reputational risk.

Banks can also work with an MCA partner on “white label” solutions that allow them to market SMBs financing products and services under their own brands but with the MCA provider doing the heavy lifting behind the scenes — and assuming the balance sheet risks. By sending declines to their MCA strategic partner, banks may be able to stem attrition and increase revenue.

Key Questions Banks Should Ask an MCA Provider
The concept of banks partnering with alternative lenders is not new. Major players in the alternative lending industry work with JPMorgan Chase Bank, Regions Bank and Citizens Bank. They provide banks with proven technological innovations that expand the banks’ growth potential for working with SMBs and allow for a wide variety of cross-sell opportunities.

With interest in the MCA space at an all-time high, many SMB financing providers are vying for attention from banks. With so much at stake, it is critical for banks considering one of these partnerships to select the right partner that can satisfy existing and prospective customers with a truly high-touch experience. To do so, banks should ask the following questions during the proposal and evaluation process:

  • Is the MCA provider a reputable player in the industry?
  • Does it have solid financial backing?
  • Is its senior leadership team experienced with navigating numerous economic cycles, and is it committed to the highest operating standards?
  • Does the MCA provider use best-in-class business processes and provide exemplary service to its customers and business partners?
  • Does it use state-of-the-art technology to efficiently scale its business, manage underwriting analytics and manage risk?

Final Thoughts
A strategic partnership between a bank and an MCA provider ultimately should be a mutually beneficial “win/win” situation for both partners. Most importantly, the biggest winners are the SMBs that would otherwise not have fast access to much needed capital to fuel their businesses. Given the leading role SMBs play in driving our economy, everyone stands to win from providing more ways to support their growth and financial health.

Christine C. Chang joined 6th Avenue Capital in 2016 and was appointed CEO in 2017. She oversees all strategic aspects of the business including transforming 6th Avenue Capital into an agile and quality small business funder.

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