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Most software companies shouldn’t build a capital product. Here's why:

Convenience has now become table stakes. 

In the past few years, especially since the onset of COVID, we’ve come to expect that what we need can be dropped on our doorstep with the click of a button. Those expectations go beyond our personal lives and carry over into how we run businesses, which is why embedded financing is growing so fast. 

For independent software vendors (ISVs), offering capital to their customers can be a powerful step up in the relationship. Putting capital in their hands when they need it helps ensure SMBs stay healthy and operating, and giving them access to that capital through your software platform increases stickiness and loyalty by letting them get everything they need in one place.

Small business owners want quick access to capital where they already spend time, in the software they use to run their business day to day. Add to that increasingly difficult access to traditional financing, and there’s an enormous opportunity for software companies. But in addition to the opportunity, it also presents a big challenge.

The challenge of building embedded capital 

To put it simply, building a capital product is incredibly hard. There are a lot of moving parts and hurdles you have to clear to make it sustainable. When you really break it down, there are five crucial requirements:

The trouble is, access to capital hinges on the successful execution of the previous four requirements. The increasing verticalization of software gives an advantage in two of these areas, but can software companies overcome the others? 

And when it comes to building in-house, should they even try?

The verticalization of payments and industry-specific software 

The verticalization of payments has been an ongoing trend, with comprehensive software tools that help business owners manage their operations seamlessly. This trend will only continue, leading to more end-to-end operating systems that simplify business management and payment processing. A prime example is Toast, a widely recognized platform that helps restaurateurs oversee just about everything.

Industry-specific software holds unique, accurate, real-time transaction data, which can be a solid foundation for a capital offering. It also provides a steady funnel of new customers, already engaged with the software and using it regularly. However, while vertical software can address the first two requirements of low CAC and consistent data, it falls short in underwriting expertise, operational efficiency, which limits access to external capital. 

These are formidable challenges that even many pure-play lenders struggle with, especially during tough economic cycles. Having had the opportunity to play a significant role in the growth of both QuickBooks Capital and Square Banking, I can say two things for sure: these are high hurdles to jump, even for companies with massive resources available to them, and they’re the kind of problems that Fintech was born to solve.

Integrating financial services within industry-specific software can provide a ton of value to business owners. But the greatest strength of these software companies lies in their specialization. They intensely focus on and understand their industry, and building a capital product in-house distracts from that focus in a way that would be catastrophic. The solution is to partner with someone whose strong suit is connecting businesses to capital through technology. 

Fintech has a significant role to play in making financing more accessible to small business owners, and embedded financial services make perfect sense. With domain expertise across finance and technology, the right Fintech partner can automate the underwriting process, getting accurate results from live data with as little as 3-6 months of history, whereas banks traditionally need two years of audited financials and tax returns. 

Along with operating efficiency and tech-driven underwriting, they can also build compliance and regulatory tools into their embedded offerings, creating a turnkey solution. This allows software companies to leverage their deep industry knowledge and data through an embedded solution as simple as an off-the-shelf product.   

At Pipe, we’ve built an embedded product, 

, that does exactly that. Vertical SaaS companies and payment processors can deliver a fast, frictionless capital experience to their customers, with a native look and feel, without building anything from scratch. Multiple integration options let them decide exactly how hands-on they want to be with the process, based on resources and priorities, and they can launch capital to their customers in as little as a few weeks. 

The rise of embedded finance presents an exciting opportunity for software companies to expand their offerings and empower small businesses. However, it's crucial to recognize the challenges inherent in building a sustainable capital product. Careful consideration, expertise, and strategic partnerships are essential for success in embedded finance. Vertical software solutions and Fintech can work together to create massive value and give small businesses a new level of financial access.

Building a capital product is no small task. Here are three reasons most software companies shouldn't even try.

Building an embedded capital product is no small task. Here are three reasons most software companies shouldn't even try.

Here's why most software companies shouldn’t build an embedded capital product. 

Here's why most software companies shouldn’t build a capital product. 

Why Pipe?

If you’re weighing multiple options or are currently working with an embedded partner and wondering if it makes sense to switch, here are a few reasons Pipe stands out from the crowd.

With Pipe Capital, launching a new product offering is incredibly fast and straightforward. Our seamless integrations help you accelerate your growth and your customers’ access to the capital they need. Choose from Pipe-Hosted, Embedded UI, and Capital API-only options and leverage Pipe’s expertise to transform your financial ecosystem and drive revenue growth effortlessly. We’ll manage all risk and capital markets, so you can launch without financial investment or risk to your business. Our expert team will walk you through integration and support your go-to-market launch to help you get the best possible results.

We achieve a 9.4% first month activation rate for our vertical SaaS partners through:

Our partners report significantly higher activation rates compared to other embedded options, thanks to our tailored underwriting models, expert GTM support, and dedicated revenue team. Our underwriting models can be trained to your customer base—and are based on business performance, not FICO scores—allowing us to serve more of your customers than many competitors. With our comprehensive launch playbooks, you'll achieve optimal customer activation through personalized strategies, including email, direct mail, in-product banners, and more. 

Offer a seamless experience your customers will love

Merchants give Pipe a 77 net promoter score

By embedding with Pipe, you give your customers access to frictionless financing that feels native to your platform. Pre-approved offers, flexible and transparent payment terms, and merchant-friendly support are all reflected in our outstanding NPS score (average NPS is 44 for financial services and 30 for banking according to 

Pipe distinguishes itself through three key advantages:

: Typically require 1-3 months or longer for frontend development and API integration.

: Multiple options let you find the perfect balance of speed and customization. Our Pipe-hosted pilot can launch within a few days with no engineering lift. The Embedded UI provides a quick route to unlocking higher funnel metrics, while our full API solution lets you take complete control of the user journey on top of Pipe’s infrastructure.

: More rigid and less user-friendly in terms of integration and customization options. Pre-qualifications that are not indicative of final approvals and subject to additional credit checks.

: Select the embedded option that works best for your timeline and resources, with zero engineering lift for Pipe-hosted. We also offer multiple revenue flow options like Split Pay and FBO, so you choose the right experience. 

Customers can apply in minutes, and payments are automatically handled as revenue flows through your platform. Our multi-draw structure lets them take exactly what they need, returning for additional advances as needed. 

a large number of customers, they have a steep drop-off from additional checks. Pipe offers

with no additional credit checks, with 98% of pre-approvals translating to full approval.

Partners benefit from our extensive expertise. We've conducted numerous tests to optimize user experience and funnel metrics from day one. Our tailored underwriting evolves with each partner, while our models continuously learn from partner interactions and direct business. For partners, this translates into more addressable customers, higher conversion rates, and more advances executed.

: While competitors are limited to email campaigns, Pipe offers a range of activation options, including SMS, direct mail, ads, and white-labeled sales support, resulting in superior conversion rates. Our Go-to-Market team is here to help ensure the success of your launch and beyond.

Partner with Pipe to offer your customers the financial tools they need to grow and thrive. Experience the difference with fast, seamless integration, outstanding activation rates, and exceptional customer satisfaction.

See why partners are choosing Pipe over other embedded capital providers, and why merchants choose Pipe too. 

Learn why Payfacs, vertical SaaS, and other platforms are choosing Pipe as their embedded capital partner. 

See what sets Pipe apart from other embedded finance partners

Why Pipe? See what sets Pipe apart from other embedded finance partners

Is a Merchant Cash Advance Right for Your Business?

For small businesses, access to capital is critical for growth and success. One option that small business owners are increasingly turning to for quick and nimble access to capital is a 

However, like any financial decision, there are pros and cons to consider before proceeding with this type of alternative funding. In this article, we’ll dive into merchant cash advances to help you determine if they’re the right choice for your business. (

To learn more about Pipe Capital's unique approach to MCAs, head over here

Understanding the merchant cash advance 

Before digging into the pros and cons, let's first understand what a merchant cash advance is. Simply put, it’s an alternative form of financing where an MCA company provides a lump sum payment to a business’s bank account in exchange for a percentage of its future credit and debit card sales.

Merchant cash advances have gained popularity among small businesses in recent years thanks to their flexibility and accessibility. Unlike traditional bank loans, which often require extensive paperwork, a lengthy approval process, and oftentimes collateral, not to mention years of operating history, MCAs offer a quicker and more streamlined funding solution.

A merchant cash advance is not a loan but rather an advance on future revenue. This means that the funder takes a calculated risk based on the business's projected credit and debit card sales. In return, the business agrees to pay the advance, along with a predetermined fee, by allowing the provider to collect a portion of its daily or weekly credit and debit card transactions.

One of the key advantages of a merchant cash advance is that it allows businesses to access funds quickly, without the need for collateral or a high credit score. This makes it an attractive option for businesses that may not otherwise qualify for traditional loans or have urgent funding needs, such as an oven on the fritz or a truck in the fleet requiring repair.

Once approved for a merchant cash advance, the business receives a lump sum payment in their bank account. This 

 can be used for a wide range of use cases for your business, such as 

 repairing or upgrading equipment, or covering unexpected expenses, to name a few.

The payment is structured to ensure that the capital provider receives a portion of the business's daily or weekly credit and debit card sales until the advance, along with the agreed upon fee, is fully repaid. This payment arrangement continues until the capital provider has recouped the full amount, plus the fee, also known as a factor rate, which is 

the amount fluctuates based on the business's sales volume typically

 expressed as a decimal in a range of 1.1-1.5. 

For example, a $10,000 USD advance at a factor rate of 1.2 is another way of illustrating a fee of 20%. Here’s the equation:  

1.2 x $10,000 USD = $12,000 USD total payments  

It's important to note that the payment process is typically automated, with the funder deducting a fixed percentage from the business's daily or weekly credit and debit card transactions. This means that the payment amount fluctuates based on the business's sales volume, providing some flexibility when times are slow. 

Merchant cash advances are often used by businesses in industries with high credit and debit card usage, such as retail, restaurants, and e-commerce. The payment structure aligns with the business's cash flow, as the provider only collects a percentage of the credit card sales, rather than a fixed monthly payment. When business is good, payments are on the higher side while during slow periods payments are smaller.

Furthermore, merchant cash advances are not subject to strict payment schedules or term limits. This allows businesses to focus on their operations and growth, without the added pressure of meeting monthly loan payments.

Compared to more traditional options, a merchant cash advance offers several advantages that can benefit businesses in need of quick access to capital.

One of the primary benefits of a merchant cash advance is the quick infusion of cash it provides. Unlike 

, which can take weeks or even months to be funded, a merchant cash advance can be obtained within days. This swift access to capital allows businesses to seize opportunities and cover immediate expenses that they might otherwise miss.

Additionally, unlike conventional loans, a 

merchant cash advance does not typically require collateral

, such as a piece of real estate or machinery to back the funding. Instead, the capital provider assesses the risk based on the business's credit and debit card sales volume and reserves the right to collect a portion of future transactions. This eliminates the need for businesses to put up valuable assets as collateral so a business owner can sleep better at night. MCAs also don’t typically require personal guarantees, which are common with loans.

Yet another advantage of a merchant cash advance is that they often have higher approval rates. Traditional lenders may deny loan applications due to various reasons, such as a 

, insufficient credit history, or lack of collateral. However, with a merchant cash advance, the primary consideration is performance, more specifically the business's credit and debit card sales volume, making it easier for businesses with lower credit scores, a limited operating history, or few assets to obtain financing.

While merchant cash advance offers several benefits, it is crucial to consider the potential drawbacks before making a decision. 

One of the potential drawbacks of a merchant cash advance is the cost. Since the capital provider assumes a higher risk by not requiring collateral or performing an extensive credit check, the fees associated with this type of financing may be higher than those of traditional loans. It’s essential to carefully consider the cost and evaluate if the benefits outweigh the expenses before signing on the dotted line.

Another consideration is the potential impact an MCA can have on 

. Payment for a merchant cash advance is directly tied to the business's daily or weekly credit card sales. During periods of lower sales, the payment amount decreases. When sales are up, the payment amounts will also increase. It’s important to consider your future revenue and whether you anticipate a spike that could cause your payments to go up. 

As with any business decision, it is vital to thoroughly evaluate your specific needs and goals before pursuing a merchant cash advance.

Take the time to review your financial situation and determine if a merchant cash advance aligns with your business's financial goals. Consider your current cash flow, revenue projections, and the potential impact of payments on your day-to-day operations. Keep in mind the short-term nature of MCA financing and the expectations of the funder. 

Furthermore, clarify your business goals and growth plans. Evaluate whether a merchant cash advance will contribute to your business's long-term success or if alternative financing options may be more suitable. Be sure to weigh the pros and cons against your unique circumstances.

In conclusion, a merchant cash advance can be an attractive option for businesses in need of short-term working capital. However, it is important to carefully consider the pros and cons and assess your specific business needs before making a decision. By doing so, you can determine if a merchant cash advance is the right choice for your business's financial goals and chart a path to success.

Learn the ins and outs of merchant cash advances, the types of businesses that benefit most, and if an MCA is right for your capital needs.

Learn the ins and outs of merchant cash advances, the types of businesses that benefit most, and if an MCA is right for your working capital needs.

Is a merchant cash advance right for your business?

The Future of Merchant Cash Advances: Trends and Predictions for SMB Financing

In small and medium-sized business (SMB) financing, 

 (MCAs) have emerged as a popular alternative to traditional lending options. However, MCAs are evolving, and staying on top of emerging trends is crucial for both funders and SMB owners seeking financing solutions. 

In this article, we will explore the mechanics of merchant cash advances, examine their role in 

, and delve into some of the key challenges they present to business owners. We’ll also discuss the emerging trends in this market, explore potential growth areas for merchant cash advances, and analyze the impact of economic shifts on this financing option. 

Finally, we will provide strategies for SMBs to adapt to the changing landscape and evaluate whether or not a merchant cash advance is the right fit for their business. 

Merchant cash advances are a form of financing that provide up-front capital to SMBs in exchange for a percentage of their future sales. Delivered as a lump-sum amount to the business operating account, MCA funding is a fast solution for businesses where cash flow is tight or bank financing is not an option.  

, which are paid in fixed installments, MCAs are paid back through deductions from a business’s daily receivables, mainly credit and debit card sales. With typical advances ranging from $5,000 to $200,000, this alternative form of funding has been a go-to solution for business owners for roughly two decades, perhaps owing to its flexible payment structure in which payment amounts fluctuate with sales.

Merchant cash advances have become increasingly popular among SMBs due to their accessibility and speedy approval process. Unlike traditional lenders, MCA providers don’t force business owners to jump through hoops like heavy paperwork, 

, and other challenges, instead making funding accessible to a broader range of businesses. 

Moreover, MCAs are much faster than traditional loans. Same-day approvals are common, with funds being delivered to a bank account in as little as a day. This speed can be critical for SMBs facing urgent needs, such as when a piece of equipment breaks down or they need to supplement their inventory during a busy season.

The popularity of merchant cash advances has been steadily increasing in recent years, primarily due to the accessibility factor. Many small businesses find it challenging to qualify for bank loans due to issues such as a limited credit history, lack of collateral, or seasonal revenue streams. MCAs offer an 

 option that addresses these sensitive needs, making them an attractive choice for many SMB owners.

While merchant cash advances offer benefits to SMBs, they typically come at a higher cost. The fees and interest rates of MCAs can be higher compared to traditional loans, while payment periods can be shorter

which can mean higher payments and smaller funding limits for business owners. 

Additionally, if the MCA program is structured incorrectly, SMBs run the risk of what’s known as stacking MCAs, where multiple advances are stacked on top of one another, which can lead to untenable payment percentages. 

Emerging trends in merchant cash advances 

The MCA industry has been quick to embrace technological advancements. As financial technology, or fintech, continues to evolve, it has introduced innovative solutions that enhance the efficiency and accessibility of MCAs. One such example is the integration of artificial intelligence (AI) and machine learning algorithms to automate the underwriting process, resulting in faster approvals and more accurate risk assessments.

While traditional financial underwriting can create a one-size-fits-all approach that overlooks many businesses, fintech-enabled MCAs can analyze revenue patterns and determine the eligibility of a wide range of business almost instantly. At Pipe, we leverage state of the art technology to make capital more accessible to business owners, directly through 

 and embedded in the software platforms they rely on everyday to run their businesses. With a deeper understanding of revenue trends for each small business, we’re able to create customized capital offers while minimizing risk to reduce financing costs. Our data-driven approach also allows for quick, streamlined applications and approvals.

Regulatory changes and their implications

The merchant cash advance industry operates in a dynamic regulatory environment. Recent regulatory changes have sought to enhance transparency and protect borrowers from potential predatory practices. 

Pipe was built by entrepreneurs for entrepreneurs

. Our mission is to give business owners fair, fast, transparent access to unbiased capital so they can grow on their terms. That’s why every advance comes with a simple, flat fee, disclosed up front and paid over time with a percentage of revenue.   

As the regulatory landscape continues to evolve, it is crucial for both capital providers and SMB owners to stay informed and comply with the latest regulations. Adapting to these changes will foster a healthier and more sustainable merchant cash advance industry.

Predictions for the future of merchant cash advances

As demand for alternative financing options ramps up, merchant cash advances are poised for continued growth. Specifically, MCAs are expected to gain further traction in industries such as retail, hospitality, and e-commerce, where revenue tends to fluctuate based on seasonality. These industries tend to struggle with traditional loans and need an alternative source of financing that can adapt to their revenue patterns.

Business owners are increasingly looking for 

financial services embedded in the software

 they use to run their businesses day to day. This is likely to be one of the biggest areas of growth for MCA products in the future. Since MCAs are based on the payment streams processed by a business, any software platform that helps companies accept payments has the potential to 

 product to help their merchants access financing based on those processed payments. This allows small businesses to streamline their operations and obtain financing through a provider who deeply understands their industry.

The impact of economic shifts on merchant cash advances

The economic landscape also plays a vital role in the performance of merchant cash advances. Economic shifts, such as recessions or industry-wide disruptions, can significantly impact the availability of capital, volume of sales, and, consequently, the payment capabilities of businesses. This can make traditional loans difficult to access, especially for businesses with irregular revenues or those with low credit scores or thin credit files. Regardless of the economic cycle, it’s important for both funders and SMB owners to closely monitor economic trends so they are not caught unprepared. 

Preparing for the future: Strategies for SMBs

Evaluating the suitability of merchant cash advances

Before considering a merchant cash advance, SMB owners must assess their business's specific needs and financial capabilities. Understanding the risks, such as the costs and payment structure, is essential for making an informed decision. SMBs should evaluate whether the benefits of accelerated funding outweigh the potential drawbacks, ensuring that an MCA aligns with their long-term goals and financial sustainability.

The merchant cash advance industry is continually evolving, with technological advancements and regulatory changes shaping its trajectory. SMBs must be proactive in adapting to these expectations to maximize the benefits of MCAs and navigate any challenges that may arise. Staying informed about industry trends, exploring different financing options, and cultivating a strong financial management strategy will enable SMB owners to thrive.

The future of merchant cash advances holds both promising trends and potential challenges. While merchant cash advances can offer a lifeline to SMBs, it is essential to perform due diligence on the provider and ensure the funding option is a good fit for your business. By embracing these strategies and staying agile, SMBs can position themselves for success.

Gain insights into the future of merchant cash advance funding and how it will help SMBs access capital for growth in the coming years.

Insights

Here's why most software companies shouldn’t build a capital product.

Why Pipe? See what sets Pipe apart from other embedded finance partners

Is a merchant cash advance right for your business?

The Future of Merchant Cash Advances: Trends and Predictions for SMB Financing

Pipe Blog

SubscribeGet the best of Pipe's Blog

Insights

Why Pipe? See what sets Pipe apart from other embedded finance partners

Is a merchant cash advance right for your business?

The Future of Merchant Cash Advances: Trends and Predictions for SMB Financing

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