Small Business Loans & Merchant Cash Advances – How PayPal’s move could signal an industry coming full circle

Paypal recently announced that it is expanding its Working Capital service to the UK, but the interesting tidbit is that they switched from loans to cash advances due to their possession of a banking license in Luxembourg. I’ve gotten moderately intimate with the Merchant Cash Advance and small business loan space, and this is an interesting zig from a large company when the rest of the market seems to be zagging.

What I mean by that is, small business loans around technology companies have come en vogue over the past few years. OnDeckKabbageZazma, and many others are centered around this market, looking to disrupt an older, more antiquated, and less convenient system, while still reaping the benefits of high monthly interest rates that compound quickly as investors increase their velocity of capital deployed.

That older system is known as the Merchant Cash Advance. The MCA space works much differently from a loan, as it skims a set percentage of money off the top of a business (revenue) and often requires much more information from the lendee in order to evaluate. The general feel of the space from the outside is somewhat predatory, as annual interest rates can be well above 25%. The interest rates reach this level due to the short-term working capital needs that many companies have, but aren’t able to fulfill through a bank.

The aforementioned companies like OnDeck have done a great job in both turnaround time (a key component) and branding for these small business loans, which has led to multiple rounds of financing totaling over $300M and credit lines from entities like Goldman Sachs to increase growth and deployment.

All of these factors make it interesting that Paypal has opted to switch to the MCA. While the business model is definitely more advantageous for the lender, branding plays a greater role than you’d think. Even in the post on TechCrunch, it was framed as “pay them back as you earn money, and don’t pay when you are not”. That sounds nice until eBay comes knocking on your proverbial door with a claim to your assets that you are trying to sell through their platform.

Admittedly, I am not as familiar with international small business financing options, but with a leader in payments shifting back to this model, it seems to be a pretty big indicator that the MCA is a more profitable endeavor for these lenders. Moving forward, is it possible we see OnDeck utilize its technology and risk management to split up their business (perhaps under a different brand name) and offer the traditional MCA? I wouldn’t be surprised.

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