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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Feb 9, 2021

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While consumer advocates have achieved some victories in court and on the streets regarding the ongoing payday loan wars, certain cash advance lenders are continuing to expand their foothold online. These lenders offer a specific type of financing called a merchant cash advance loan. Online retailers, or e-tailers, have found merchant cash advance loans to be a source of funding well suited to their online nature.

Danni Ackerman, an eBay store owner, found that getting a business loan from her bank was all but impossible, as told in a story by the Las Vegas Review-Journal. In order to sustain her business operations she simply couldn’t afford to wait for the bank’s lengthy approval process. Ackerman rode her entrepreneurial spirit and decided to seek a lender who would actually provide what she needed.

Her search found Kabbage Inc., an online merchant cash advance lender. In a hybrid mix of payday lending and traditional business lending, Kabbage reviews the transaction data, analytics, shipping data, and payment records of online businesses in order to determine whether they are viable borrowers. Similar to payday lenders, a merchant cash advance lender looks beyond credit scores. That practice has been a boon to Ackerman.

“I’m on my eighth advance. I’ve used them to purchase merchandise and upgrade equipment. It’s been a really good deal for me,” said Ackerman.

Merchant cash advance loans are different from traditional cash advances because they are exclusively available and marketed towards online businesspersons, such as Ackerman. They also come with much lower annual percentage rates than your typical payday loan.

The cash advance loans that Ackerman borrowed from Kabbage have ranged from $500 to $2,000, with 2 to 7 percent interest rates charged over a six-month period.

According to research company EMarketer, e-commerce businesses—like Ackerman’s eBay operation—are expected to grow to $224.2 billion this year. This is an increase from $194.3 billion last year. Such a massive increase in online businesses will no doubt provide a pool of potential customers for the merchant cash advance loan industry.

Merchant cash advance lenders have mirrored the rapid speed of online payday loan lenders. Ackerman claims that she knows whether she was approved or not within a matter of minutes to an hour.

“If I don’t have the cash reserves to buy the merchandise, I’ll go to Kabbage. It’s not a long-term loan. It’s easier than dealing with a bank, and it takes less time for (the money) to be deposited in my PayPal account,” she said.

Ironically, large and traditional lenders often refuse to offer financing to the booming e-commerce industry since—unlike physical stores—online retailers usually have little to no collateral to secure a lender’s money.

Adding weight to the expansion of merchant cash advance loans in the online lending market is the addition of former Yahoo and PayPal executive Scott Thompson to the Kabbage board of directors.

“Kabbage is rapidly reshaping the small business financing space in the same way that PayPal reshaped the payments space over the last decade. I enjoy working with and believe I can have the most impact on companies that are re-inventing the ways financial services are delivered to consumers and small businesses,” said Thompson in a press release.

Kabbage has aided Ackerman and—thus far—not proven to be a toxic lender. This shows that internet and market innovation can result in useful and healthy short-term lending practices. More specifically merchant cash advance loans can further aid the economy’s recovery—both online and offline—by offering credit to borrowers who are unable to find recourse through traditional lenders. So long as conventional lenders view online businesses with the same lenses they view physical businesses, conventional lending will not contribute to economic recovery and growth. Merchant lenders like Kabbage and its rivals are only all too happy to see conventional lenders sit on the sidelines as they innovatively rake in profits and redefine merchant cash advance lending.