The MCA Industry Wants to Be Banks. Silicon Valley Wants to Be the MCA Industry.

There’s a funny thing happening in small-business finance right now.

For years, merchant cash advance companies proudly sold MCAs. Now many of the bigger players are sprinting in the other direction, rebranding around loans, lines of credit, longer terms and monthly payments.

Everyone suddenly wants to look like a bank.

Meanwhile, Shopify, Stripe, Square, PayPal, DoorDash, Amazon, Walmart, eBay and GoDaddy — some of the most sophisticated companies in the world — have all gotten involved in sales-based financing.

In other words, while the MCA industry is trying to become lenders, Silicon Valley is embracing the basic mechanics of the MCA.

Somebody’s wrong.

Or maybe nobody is.

Here’s my read: the structure itself was never really the problem.

Advancing capital against sales you can actually see, with repayment that can flex with revenue, has a lot of logic to it.

The problem is what parts of the industry layered on top of that structure: brutal pricing, absurdly short durations, stacking, endless refinancing.

But here’s what I find even more interesting. Look at what many of these programs have in common — tech-platform financing, traditional MCAs, even SBA loans. They’re often financing the same thing:

“Working capital.”

Which, if we’re being honest, can mean almost anything. The application says working capital. The provider approves working capital. The money goes out.

But too often, nobody has really answered the most important question:

What is this money actually going to pay for?

Because the answer should determine the financing.

If you’re buying inventory that turns into cash in 60 days, paying a premium for capital you can access tomorrow may make perfect sense. If you’re hiring five salespeople who won’t become productive for six months, that’s an entirely different financing need.

Same with opening a location. Buying equipment. Refinancing debt. Funding an acquisition. Those investments need time to generate a return.

Take a 12-month financing product. In many structures, a substantial portion of the capital has already been repaid before the thing you financed has had a realistic chance to pay for itself.

That’s not necessarily a bad financing product. It’s the wrong financing product for that use.

And that’s the distinction I think small-business finance still gets wrong.

Short-term needs belong in short-term programs. Long-term investments belong in long-term capital.

Sometimes that means sales-based financing. Sometimes it means a line of credit. Sometimes it means an SBA loan with a 10-year amortization. And sometimes the right answer is not borrowing at all.

The question shouldn’t start with “How much can we get this business?” It should start with:

“What are we financing?”

Then you work backward into the right structure, cost and duration.

It sounds obvious. But an enormous amount of small-business capital is still distributed the other way around: approve the amount, sell the product, wire the money, and figure out what it was really for later.

I think the next generation of small-business finance will be better than that. Better data has already made underwriting faster. The next step is using that data — and actually understanding the business — to make the capital smarter.

Right use. Right structure. Right duration.

That’s the discipline this industry keeps skipping. And it’s how we think about every deal at Irving Fund.

---

If you’re weighing capital, that’s the question we’d start with too. Talk it through with us whenever you’re ready.