Big Tech’s new take on Merchant Cash Advance

Recently I stumbled upon one of the capital solutions offered to merchants by the major platforms such as Shopify, Stripe, PayPal and Amazon.

There is nothing new in the industry of merchant financing per se. Though I was very much intrigued by how this new Big Tech’s take on Merchant Cash Advance—one of the worst forms of usury that survived the middle ages—plays out.

In the words of Harley Finkelstein, Shopify’s COO:

It’s not a loan. It’s a cash advance because if you don’t sell anything tomorrow, we’re not taking anything out.

No credit checks, no deadline on the repayment. The business is not obligated to pay for anything if they’re not making sales. There’s no interest; it’s a factor rate, which is different. And it’s not secured with any collateral.

Ok, ok! I got it—it’s not a loan, at least technically; hence it has no interest. But it has a cost, that’s for sure. Therefore, the previous quote probably reads more like: “Don’t worry, we got it alright with our corporate lawyers so we’re fine to charge you whatever it takes.”

On the other side, for a small cash-strapped merchant, it could be her last resort to sell the future revenues during the low season to stay in business.

And so my question is, financially, is it a sound decision for her to go for super expensive money at this particular moment? Do the big guys with their big brains and all the Big data help her have it right?

And if they do, why the rates are so high? If all the data is there and the risk is measured alright, the business model could be starkly different from the traditional usury practices of “lend to a hundred at a crazy rate for five to repay”.

It could be “lend to a hundred at a moderately profitable rate for all them to repay and keep growing”. Fueled by the data and some black predictive magic, it could be a super-powerful instrument to advise and finance small and medium merchants.

Along with eCommerce & SMM stuff, I’m sure they will eagerly outsource the finance management if it helps keep the cash flow going and the price is fair.