Merchant Cash Advances: A Beacon of Hope in Recessionary Times
As the global economy witnesses dramatic shifts, with skyrocketing oil and gas prices, plunging cryptocurrencies, and extreme volatility in stock and bond indexes, whispers of a potential recession grow louder.
But with every challenge comes potential opportunity, and the Merchant Cash Advance (MCA) industry is no exception.
Drawing on our experience navigating through the 2007-2009 recession and the recent COVID-19 crisis, we have an optimistic outlook on the MCA industry’s prospects during potential economic downturns.
For those of you in a rush, here are the key takeaways:
- The MCA industry has successfully navigated past economic crises.
- In a recession, stronger credit quality merchants will quickly turn to the MCA space, maintaining or increasing industry pricing rates.
- The 2007-2009 period saw historically strong returns from a risk/reward perspective, suggesting the potential for similar opportunities in future recessions.
- A multi-year view and reinvestment strategy can generate favorable compounded returns for MCA investors.
Here’s the detail
The MCA industry has thrived for decades, offering revenue-based financing for small businesses and merchants. It proved its resilience during the 2007-2009 Recession and the COVID-19 pandemic, with many in the industry considering these challenging times as prime opportunities for growth and investment.
While history never exactly repeats itself, it can certainly rhyme, and we believe the MCA industry can thrive in a recession, similar to what we experienced over a decade ago.
MCAs provide what banks won’t during a recession
One key factor that could drive growth in the MCA industry during a recession is the reduction in available capital for small businesses. As traditional lenders, such as banks and alternative lenders, become more risk-averse and withdraw from the market, merchants will turn to MCA providers for financing.
This shift creates a unique opportunity for the MCA industry to step in and fill the void left by traditional lenders.
In previous economic crises, we have seen MCA portfolios perform positively despite initial challenges. For instance, during the COVID-19 pandemic, MCA portfolios experienced a spike in default rates, but as the economy rebounded, default rates also decreased, and many portfolios yielded positive returns.
Similarly, during the 2008 recession, the MCA industry quickly adapted to the changing economic landscape and created well-balanced portfolios.
A higher proportion of top quality merchants
Another potential advantage for the MCA industry in a recessionary environment is the influx of higher credit quality merchants. As these merchants lose access to traditional financing options, they will turn to MCA providers for their working capital needs.
This influx of higher credit quality merchants has historically maintained or even increased industry pricing rates while creating stronger portfolios with similar target yields.
The MCA industry has come a long way in managing and underwriting risk in stressful environments thanks to improved data collection, transparency, and reporting. These advancements, combined with Supervest’s ability to analyze thousands of data points from our partners, uniquely position us within the industry.
A time of opportunity
To summarize then, although the exact timing and impact of a recessionary event are notoriously difficult to predict, our experience from past economic crises suggests that the MCA industry can adapt and thrive in challenging times.
With a strong supply of high quality merchants, an ability to pivot quickly, and a focus on high-return investment strategies, we believe the MCA industry can continue to offer favorable opportunities for investors.
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