March/April 2014 – Issue 2

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Merchant Cash Advance and Crowdlending

By: Nik Milanovic, Funding Circle

2013 was a marquee year for online lending, particularly crowdlending and Merchant Cash Advance (MCA.) Investors went all in, whether it was Accel Partners’ reinvestment in CAN Capital or Blackrock’s venture round to Prosper. The market continued to grow as Lending Club passed the $3 billion origination mark, with $2 billion of loans in 2013 alone. The first annual Lendit conference in New York that focused on the growing online lending industry, was dramatically oversubscribed.

All this points to a growing trend that continues to evolve out of the still-too-recent financial crisis: consumers and businesses are looking outside of banks for debt capital and private companies are rushing to fund their needs. Dozens of online lending companies opened their doors in the last year alone, with big players such as Amazon and Google getting in on the action by lending to their own merchants and employees. This raises a question, in this space, are products as diverse as MCAs and crowdlending poised for competition as private online lending grows?

At Funding Circle, we believe strongly in the small business crowdlending model and its value proposition to borrowers. Though there are similarities to MCAs, the focuses of these two models are dissimilar enough that we feel there is little competition between MCAs and crowdlenders.

The size of the market alone should allow MCAs and crowdlenders to carve out their own space comfortably. The small business financing market was $462 billion in 2012 – to put that in perspective, Lending Club, the largest crowdlender in the market, only lent $2 billion in 2013 – and mostly to consumers. That volume represented a run rate larger than the 5 biggest MCA companies combined. Although online lending companies continue to grow, they barely nibble at their addressable market. Only $19 billion of the total commercial market was made up of private term loans. This indicates a huge opportunity.

In addition to the outsize market, the applicants that MCAs and crowdlenders tend to target are widely diverse. These differences should allow, if not mandate, that MCAs and crowdlenders serve significantly distinct markets.

To start with, the reasons that businesses seek out these options tend to differ. MCAs normally carry a much shorter duration, often less than a year, making them more suitable for working capital, advances on purchase orders, and funding for short-term projects. Most crowdlenders provide term loans with payback periods from 3 to 7 years, which lend themselves to earlier-stage companies (due to smaller monthly payments) and longer-term projects.

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