It’s not often that a comprehensive academic piece of work is released detailing our industry, so we are very excited to share this whitepaper on the merchant advance industry. Our CEO David Gens had a hand in writing it and it does a great job of explaining how merchant advances fit into the business financing landscape.
The key focus of the paper is on explaining why small businesses tend to pay a higher cost of capital than large businesses. One of the reasons is that large businesses tend to have a more diversified customer base, greater economies of scale, buying power, monopoly power etc. therefore making them “lower risk” and justifying a lower cost of capital. However, there is another very very important factor at play. This is simply the fact that transactions involving injections of capital – whether in the form of equity or debt – have certain costs. These are costs to evaluate, structure, and execute the transaction, as well as to monitor the deal afterwards. On a percentage basis these costs are way, way bigger for a small business than they are for a large one. And this has a very significant effect on the ultimate cost of capital.
Merchant advances have decreased the cost of capital for small businesses by leveraging technology and creating new innovative funding options. It has created an entirely new viable alternative to bank or equity financing. This is massively increasing the availability of capital for small businesses (which have been increasingly ignored by the traditional Canadian banks) which in turns fuels economic growth and job creation. Have a read through the paper and let us know what you think!