4 Minutes Read.
Merchant cash advance (MCA) lending is a popular alternative to traditional loans for small businesses. For lenders, however, the MCA lending process requires more work and can take longer than conventional loans. Automated underwriting platforms offered by MonJa can help streamline the MCA lending process and improve productivity.
How MCA Lending Works
A merchant cash advance is technically not a loan, but a lump-sum advance against a business’s future sales receipts. In regulatory terms, it is considered a sales transaction, which means it is not subject to as many rules as small business loans. Credit scoring does play a role in MCA lending, but the primary criterion for receiving the cash advance is the merchant’s sales history. As a rule of thumb, most MCA lenders ask for three years’ history, along with other documents to establish the business’s legitimacy. Examples include copies of income tax returns, financial statements, or business registration. The MCA is paid by a “holdback,” or a percentage deducted from the business’s daily credit card sales. While this requires the business to give the lender access to the business owner’s credit card merchant account, it eliminates the traditional need for collateral.
Terms of an MCA agreement typically include the amount of the cash advance, the amount to be repaid, and the holdback amount. The agreement sometimes includes a term for repayment, but not always. Because the repayment amount is fixed and the holdback amount is a percentage of credit card sales, the time frame for repayment can vary. Lenders, however, will sometimes stipulate a term to prevent excessively lengthy repayment periods.
Advantages Of MCA Lending
For lenders, offering MCA lending can be an attractive proposition. The market for MCA lending is enormous and growing very rapidly. According to some estimates, MCA lending, which first appeared in 1998, expanded to $10.7 billion in 2015 and was expected to top $15 billion in 2017.
Another study done in 2016 calculated the compound annual growth rate of the MCA sector at 56 percent. Indeed, competition in the sector is fierce. It is estimated there are more than 22,000 MCA lenders in the US alone. What’s more, demand for loans is enormous. The unmet funding demand for small businesses is estimated to be between $80 billion and $120 billion.
Although MCA lending is not risk-free, the profitability of MCA lending is generally much greater than conventional loans. Factor rates for merchant cash advances typically range from 20 percent to 40 percent, two or three times the interest rate that can be charged on a conventional high-risk small business loan.
The challenges for MCA lenders come from the type of customer and their expectations for rapid processing and payouts.
MCA lending is considered a good alternative for so-called “unbankable” small business clients. Common customers include new businesses, businesses with a poor or limited credit profile, businesses that are considered high-risk by traditional lenders (such as restaurants), or businesses with immediate cash needs. Generally, these customers do not fit traditional credit scoring frameworks, and thus require more underwriting effort. Because customers have many options, not only among MCA providers but also various online lenders, they have high expectations for convenient and fast service. Automated lending programs such as those offered by MonJa can help meet these challenges.
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What To Look For In An Automated Lending Solution
Efficiently handling MCA lending can be accomplished with an automated lending solution, but only if it has the right capabilities.
An effective automated solution enhances efficiency by putting all the necessary data in one place. Whether through a mobile or web application, customer information and documentation must be available to everyone involved in the process. This ensures accuracy, fast and convenient customer interaction, and progress. Connecting with data sources such as the customer’s bank, social media accounts, and the credit card merchant account allows faster verification of information. This saves time, allowing the lender’s underwriting team to review and process applications faster.
Because AI learns from trends and patterns in data, automated lending can accurately determine customer credit worthiness and update as new information becomes available. Finally, a good automated lending solution should integrate smoothly with existing systems. Automated lending programs offered at MonJa target different types of lenders and include all of these features, from a user-friendly interface to a highly scalable product.