This article will walk you through a detailed comparative analysis of Merchant Cash Advance (MCA) investing versus traditional investments.
The past three decades have seen significant changes in the investment sector, particularly since the financial crisis of 2008. Regulatory shifts and technological advancements have paved the way for new investment opportunities, one of which is Merchant Cash Advances.
We have researched and crafted this article to offer you an in-depth comparative analysis between MCAs and traditional investments like stocks and bonds. It will explore the risk profiles, potential returns, eligibility criteria, and diversification strategies associated with each.
At Supervest, we specifically serve accredited investors, but whether you’re an accredited investor or someone just stepping into investing, this paper will equip you with the knowledge to make informed decisions.
The Evolution of the Investing Landscape
Traditional Investments
For decades, traditional investments have been the cornerstone of long-term wealth generation. Comprising mainly stocks, bonds, and mutual funds, these investment vehicles have been widely accessible and understood. They have historically offered a relatively predictable risk-to-reward ratio, making them a favorite among investors who aim for steady growth over a long period.
Accessibility
One of the main advantages of traditional investments like stocks, bonds, and mutual funds is their accessibility. Through stock exchanges and other regulated platforms, almost anyone can invest in these assets, often with as little as a few dollars.
Predictable Mechanisms
Traditional asset classes also come with more predictable mechanisms. Basically, the workings of traditional investments are well-understood. For instance, bonds pay periodic interest and return the principal amount at maturity. Stocks offer ownership in a company and the possibility of dividends. The predictability of traditional investing routes can make them a preferred choice for those who are risk-averse or new to investing.
Historical Performance
The long-term trend of traditional assets has tended to be reasonable. While the stock market can be volatile in the short term, historically, it has returned about 7% annually after inflation. Bonds have also been stable, if lower-return, performers particularly those backed by strong entities like governments.
It’s not always quite as simple as it may appear though. Remember that whatever the average stock market return rate is, you will need to factor in the annual erosion of purchasing power due to inflation. At the moment, you can expect to lose purchasing power of about 2% to 4% per year.
Also, despite the average S&P 500 return rate hovering at 7%, the actual returns in any given year are far from average: Volatility is the state of play in the stock market. Consider that in the 96 years between 1926 and 2022, returns were in the “average” band of 7% to 12% only seven times.
Tax Benefits
Finally, certain traditional investment vehicles come with tax benefits. For example, some bonds are tax-exempt, and retirement accounts that hold stocks and bonds can defer or even eliminate some taxes.
Modern Investments & Strategies
The advent of alternative asset investing has massively broadened the range of investment instruments on offer. Asset classes like Merchant Cash Advances, real estate crowdfunding, and peer-to-peer lending have started to gain a lot of attention for the variety and attractive risk-adjusted returns they can offer.
Let’s run down some of the key qualities that MCAs have in comparison to traditional asset classes.
Flexibility and Quick Returns
One of the most appealing aspects of modern investment strategies like Merchant Cash Advances is their flexibility. Unlike traditional investments that often require a longer time horizon to yield substantial returns, MCAs can offer quicker turnaround times. MCAs can offer returns within a matter of months, allowing investors to redeploy capital more frequently.
At Supervest, we offer a 10% 12-month MCA note as well as a 12% 24-month MCA note, giving you the flexibility to try out MCA investing for a short introductory period of time without having your capital tied up for tens of years.
Potentially Higher Risk-Adjusted Returns
Alternative investments can present higher risk-adjusted returns compared to traditional investment vehicles. Although there are no guarantees, it means that for the level of risk undertaken, the potential returns can be considerably higher. It’s a more dynamic market that attracts those willing to manage a bit more risk for the prospect of increased profit.
Customization and Control
For accredited investors and family offices that value control and customization in their investment choices, we offer a unique self-directed investment vehicle. The self-directed model offers unparalleled, granular control over risk assessment and asset allocation, enabling experienced investors to tailor their investments to meet specific financial goals.
Expertly Vetted Opportunities
At Supervest, we provide an additional layer of reassurance by rigorously vetting funding companies. Our due diligence process for screening and assessing merchants is extremely detailed. This expert vetting helps ensure that the investment not only has a high yield potential but is also relatively safeguarded against default risks.
Diverse Portfolio
While traditional investments like stocks, bonds, and mutual funds do offer some level of diversification, they often move in sync with broader market trends. This can make your investment portfolio susceptible to market volatility, which could lead to risks. This will all depend on your specific allocation of course; our analysis here is very high level and focuses on comparing broad data trends on the overall qualities of traditional investments versus the data on MCA investing.
When you add MCAs to your investment portfolio, they can provide a layer of diversification that is largely independent of the market forces affecting stocks and bonds.
This is called low correlation, which means that lots of alternative assets are attractive to investors precisely because when the stock market goes down, alternative assets do not always follow the trend. They have a low correlation with the activity of the overall economy.
In short, their unique risk and return profiles can offer a counterbalance to the ups and downs of the stock market.
In essence, including MCAs in your investment portfolio can serve as a hedge against the vulnerabilities often associated with traditional investment avenues. This ability to diversify using a non-correlated asset class makes MCA investing an increasingly attractive option for investors looking to protect and grow their investments in a more balanced manner.
This is likely part of the reason that total assets under management in alternatives have skyrocketed over the last 8 years.
Data from Preqin shows that by the close of 2015, assets under management (AUM) were valued at $7.23 trillion. Fast forward to the end of 2021, and this number has nearly doubled to $13.32 trillion. Projections indicate that the AUM will continue its upward trend, increasing by approximately 11.7% to reach a remarkable $23 trillion by the year 2026.
Review
In summary, then, modern investment strategies have evolved to meet the changing needs and expectations of today’s investors, offering more flexible terms, potentially higher returns, and a broader range of investment opportunities.
If you want to compare MCAs to traditional investments you need to understand exactly what MCAs are and how they work. This is what we will cover next.
Understanding MCAs
Merchant Cash Advances offer businesses a lump-sum payment in exchange for a percentage of future sales. This type of financing is typically short-term, often maturing within 12 months.
For those of you who want more detail, we have an in-depth walk-through of exactly how an MCA works from start to finish here.
Risks and Returns
While MCAs can offer high returns, they come with their set of risks. Unlike traditional investments, MCAs operate within a different regulatory framework. The differences in regulation can mean more uncertainty, but they also provide a unique opportunity for potentially high returns.
On our platform, the maximum exposure to a single cash advance is capped at 5%, allowing for broad diversification across different industries and geographies. This in-built risk management strategy is just one of the mechanisms that sets us apart. For an example of how maximum exposure limits work, you can go here.
Regulatory Landscape
One of the defining characteristics of MCAs is the more flexible regulations governing them. What this means for the businesses that use MCAs is that they have much more flexibility and agency to use the funds in the ways that best suit their needs, from expanding operations to launching new products.
For Example:
Imagine a restaurant that receives an MCA and uses the funds to refurbish its premises and expand the menu. The upgrade attracts more customers, increasing the restaurant’s revenue, and the MCA is paid back quickly from a percentage of these new sales.
Overview of everything Investments we have covered:
We have covered a lot of ground in this article about how MCAs compare to traditional investments. Here is a recap in brief to summarize everything we have learned.
Type of Asset
- Traditional Investments: Involves investing in assets like stocks, bonds, and mutual funds.
- MCA Investing: Involves advancing cash to businesses in exchange for a portion of their future sales.
Regulation
- Traditional Investments: Regulated by governmental agencies like the Securities and Exchange Commission (SEC) in the United States.
- MCA Investing: Generally less regulated because it’s not considered a loan but a business transaction.
Risk Profile
- Traditional Investments: Risk varies from lower (e.g., government bonds) to higher (e.g., stocks).
- MCA Investing: Generally considered higher risk because of different regulations and the payback is dependent on the business’s future sales. Our 5% maximum exposure limit also helps to manage risk.
Returns
- Traditional Investments: Typically, lower returns for low-risk assets like bonds, and potentially higher returns for high-risk assets like stocks. Overall average S&P 500 return of 7%.
- MCA Investing: Usually offers higher returns, reflecting the higher level of risk. Our MCAs have successfully met their 10% and 12% returns, making all scheduled interest payments on time and in full.
Liquidity
- Traditional Investments: Varies from highly liquid assets like stocks to less liquid ones like 10-year treasury notes.
- MCA Investing: Generally more liquid, as you receive daily, weekly, or monthly remittances as the business begins paying back the advance almost immediately. Also, our MCA notes mature in 12 or 24 months, meaning your capital is not tied up for long.
Duration
- Traditional Investments: Can range from short-term trading to multi-decade long-term investments.
- MCA Investing: Generally shorter-term, with payback periods ranging from 3 to 12 months.
Diversification
- Traditional Investments: Diversification is achieved by spreading investments across different asset classes.
- MCA Investing: Platforms like Supervest allow for diversification within the asset class by spreading risk across multiple merchants, industries, geographical locations, and funding companies.
Due Diligence
- Traditional Investments: Typically involves analyzing public financial statements, market trends, etc. This can be labor-intensive and time-consuming and might require some specialist knowledge.
- MCA Investing: Platforms like Supervest perform due diligence on the funding companies and allow investors to select based on their risk tolerance.
Capital Requirement
- Traditional Investments: These can be made with relatively small amounts of money.
- MCA Investing: Our minimum investment amount is $25,000 and we serve accredited investors, family offices, and high-net-worth investors.
Conclusion: MCAs vs. Traditional Investments
The investment landscape is evolving, presenting modern investors with a huge range of choices. While traditional investments still hold their weight, Merchant Cash Advances offer an innovative, potentially higher-returning alternative. However, every investment vehicle comes with its set of risks and rewards. Whether you’re a seasoned investor or a newcomer, understanding these intricacies will help you make an informed investment decision.
If you want to learn more you can chat with a member of our team. We would love to hear from you.
You can find out more about MCAs here, or get started on your MCA investment journey here.
