Merchant Cash Advances Costly But Not Opportunistic, Fed Study Finds

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Only 71% of business owners that apply for a merchant cash advance actually get approved for them.

Equipment loans, commercial mortgages, and company vehicle loans all have higher approval rates than merchant cash advances, a comprehensive Federal Reserve study revealed. Lines of credit were approved just as often as merchant cash advances. Right behind them were business loans and SBA loans at approval rates of 69% and 59% respectively.

merchant cash advance approval rate

The statistics disprove the theory that merchant cash advance companies don’t underwrite or that they are doing so recklessly at the expense of their small business customers.

Only 7% of small businesses have ever even applied for a merchant cash advance.

merchant cash advance applications

The propensity to apply for a merchant cash advance ranked higher among businesses less than two years old and those seeking less than $100,000.

Notably, small businesses reported being much less satisfied with online lenders than banks, but overwhelmingly cited cost as the reason behind it. Big banks scored worse on transparency than online lenders among dissatisfied borrowers.

The findings are not surprising. 35% of small businesses said that speed of the decision process was a factor influencing where they applied. 37% said ease of the application process was a factor and 40% said the perceived chance of being funded played a role.

In these areas, online lenders walloped small and large banks. More than 50% of dissatisfied bank borrowers fingered a difficult application process as a reason and more than 40% said it was the long wait for a credit decision.

The results fall in line with expectations, that speed and ease often come at a cost. However, merchant cash advance companies do not appear to be approving applicants just to opportunistically charge a high fee. The approval rates are in line with other types of financial products, and are even less likely to be approved than a mortgage.

federal reserve

Last modified: March 6, 2016
Sean Murray

Category: merchant cash advance

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