Are you among the leaders of financial institutes that grapple with the complexities of underwriting Merchant Cash Advances (MCAs) to find the perfect match between borrower and lender? Strive to decode your customer business’s financial health and viability for those seeking funding.
If you nod yes, then my friend, unfortunately, your business is at risk! But you do not need to worry at all because you are not alone, and secondly, by the end of this blog, you will get your solution. A solution that will not only resolve your issue but also help you to scale up your business organically without burning funds. So, let’s spill the beans. Here’s what you will learn in this blog today:
What is a Merchant Cash Advance (MCA)?
A Merchant Cash Advance (MCA) is an alternative to the conventional bank loan for funding the business. You might not think of merchant cash advance (MCA) as the first way to get money, but it’s still a good idea to know what it is and how it works.
As per Yahoo Finance, the global Merchant Cash Advance market size will reach $1.721 billion by 2027. To streamline money is one of the hardest things when it comes to running your business.
Your role as a merchant cash advance provider, also known as financial institutions or individuals, is to offer your clients a lump sum in exchange for a share of the company’s future sales or other reasonable terms as per business needs.
If a business has a lot of credit card sales but doesn’t meet the criteria for a conventional loan, they might want to look into a merchant cash advance.
How do MCAs Differ from Traditional Loans?
A traditional loan means borrowing money from a bank or other lending organization and paying it back with interest over a certain length of time.
Who are MCAs for?
Businesses that need money for immediate costs or are looking for a short-term infusion of capital can use MCAs. Businesses that process a large number of credit card transactions can potentially benefit from this option. Some other desirable profiles for MCAs are as follows:
- Companies whose cash flow is highly dependent on the seasons and who are aware that their remittance rate is directly proportionate to their sales are considered seasonal.
- Companies whose credit is less than stellar.
- Companies that don’t have a lot of physical assets.
What’s the Worth of an MCA Loan?
The worth of your client’s business determines the amount they can borrow. It means that having accurate records of the company’s income over time is crucial if you seek to secure a merchant cash advance loan since this will serve as the basis for their business’s valuation.
- The repayment schedule for the loan is a predetermined number of months spaced out over an agreed-upon length of time, often two to five years.
- Interest, the cost of borrowing money, is a component of these payments and can vary from 5% to 20% based on variables such as credit score and industry type.
What Is Underwriting?
Whether it’s a loan, an insurance policy, or a bond issuance, underwriters play a pivotal role in determining whether to accept, reject, or modify the terms of a financial agreement based on the perceived level of risk.
In simple words, it is basically like the gatekeeper of the financial world. When your clients apply for a loan or insurance, you need experts to check their financial situation and decide whether to give them the loan or not. This whole process of checking is called underwriting, and the experts are known as underwriters.
Underwriters examine all factors, such as their credit score, income stability, and the value of any collateral they might offer etc. Their goal is to make sure that the lender or insurer isn’t taking on too much risk while still giving you fair access to financial products.
They play a crucial role in maintaining the stability of the financial system while helping individuals and businesses get the financial support they need.
What Is the MCA Underwriting Process?
The MCA underwriting process is tailored to the unique needs of businesses seeking immediate financing. By focusing on credit card sales history and revenue potential rather than traditional credit metrics, they provide businesses with a flexible and accessible funding option to support their growth and expansion endeavors. In simple terms, here’s what it involves:
Application Review:
Businesses fill out an application providing basic information about their operations, revenue, and time in business.
Credit Card Sales Analysis:
They often focus on the business’s credit card sales. They analyze past credit card processing statements to determine the average daily or monthly sales.
Bank Statements Examination:
They review the business’s bank statements to assess its overall financial health, cash flow, and average daily balances.
Risk Assessment:
They evaluate the risk associated with providing a cash advance. This includes looking at the business’s creditworthiness, industry risk, and the consistency of its revenue.
Repayment Ability:
They assess the business’s ability to repay the advance. This involves considering the historical revenue and projecting how the business will generate income in the future.
Collateral Evaluation:
MCA underwriting typically doesn’t require traditional collateral. Instead, the underwriters focus on the daily credit card sales and future revenue.
Terms and Conditions:
Once the assessment is complete, the lender determines the terms and conditions of the merchant cash advance, including the amount, factor rate, holdback percentage, and repayment structure.
Approval or Denial:
Based on the evaluation, the underwriter decides whether to approve or deny the merchant cash advance. If approved, the business can receive the funds relatively quickly.
Repayment Structure:
They often involve setting up a repayment structure where a percentage of daily credit card sales is automatically deducted until the advance is repaid.
What Are MCA Paper Grades?
Paper grades are a system used by MCA providers to categorize businesses based on their creditworthiness and risk profile. Think of it like a grading scale in school. The paper grades typically range from A to D, with A-grade businesses considered the least risky and D-grade businesses deemed the riskiest.
A-grade businesses typically have a strong track record of consistent credit card sales, stable revenue streams, and a low risk of default. On the other hand, D-grade businesses may have erratic sales patterns, financial instability, or other risk factors that make them less attractive to MCA providers.
The paper grade assigned to a business can impact the terms of the MCA, including the amount of funding offered and the cost of capital, with lower grades often associated with higher fees and interest rates.
Where to Find Professional Underwriting Services?
When selecting a provider for underwriting services, consider factors such as reputation, expertise in your industry, track record, cost, and service offerings.
At The Pro Accounting, we’re here to make your financial dreams a reality. With our service, you’re not just getting a solution—you’re gaining a partner dedicated to your success.
