How Will Merchant Cash Advances Perform During a Recession?

November 18, 2022

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The US entered a recession in the summer of 2022 after two consecutive quarters of declining GDP. GDP contracted by 0.6% in the most recent quarter, following a 1.6% decline between January and March. What does that mean for Merchant Cash Advances?

The effects of the recession are likely to persist; a recent KPMG survey showed that 73% of 1300 surveyed CEOs predict that the current economic climate will continue to impede growth.

Whilst there are no guarantees in investing, there are measures you can take to give yourself the best chance of protecting your investments and spreading your financial risk during a recession.

This blog will outline how MCAs can perform during a recession and will explain the specific reasons that MCAs can offer unique benefits to your portfolio during an economic downturn.

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What happens to Merchant Cash Advances during a recession

Most of the merchants that use MCAs are high street businesses. They are the hairdressers, dentists, shoe shops and sports equipment vendors that you see downtown. All of these businesses need capital to run their daily operations, even in the tough times of a recession.

What usually occurs in a recession is that very good merchants with excellent credit, who might be getting loans from a bank to support their working capital needs, suddenly get turned away.

An aerial view of a skyscraper commercial district Merchant Cash Advances
Banks reduce their lending during a recession. Photo by Vlad Busuioc on Unsplash

Effectively, the banks tighten up their lending during the recession because they have their own risk issues and new parameters to enforce. This means that many banks begin to pull back from types of lending that they would have previously engaged in.

Because of this, high-quality, reliable, excellent credit merchants who traditionally get bank loans or some kind of alternative funding at lower rates spill into the merchant cash advance space.

The end result of this process means that as the US economy moves further into recession, the pool of merchants in the merchant cash advance sphere increases in quality and reliability.

Ultimately, MCA investing during an economic downturn can be a strong growth choice because the deals consist of a greater proportion of merchants who have a better credit quality.  All of this can mean lower default rates and a stronger return on your investment.

It is precisely because of the constrained economic environment created by a recession that these high-quality merchants get shut out from their traditional lenders, and then come to cash advance agents to continue getting access to capital for their regular business operating needs.

When the increased credit quality of recession-time merchants is combined with the unique power of daily reinvestment back into this high-quality pool of merchants, some really powerful compounding can come into play.

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