A Merchant Cash Advance is simply a cost-based acquisition of future credit card receivables. And underwriting in Merchant Cash Advance is a crucial part of the process in creating a deal.
In a typical deal, a buyer (the MCA firm) would observe that the company has been conducting USD 45,000 in merchant processing per month for the preceding 12 months and then offer to acquire USD 58,500 of those processing receivables in return for lending USD 45,000 to the company tomorrow.
The MCA company may keep 15% of the daily processed volumes of the business until the whole purchase is completed in order to collect on the purchase.
Here’s a sample of how a purchase agreement for this deal may look:
- Loan value: USD 100,000
- Origination fee: USD 1,500 (based on 1.5 per cent of the loan amount)
- Disbursement value: USD 98,500
- Total expenditure (including interest): USD 30,000
- Total repayment amount: USD 130,000
- Daily Payment: USD 515.88 (252 business day payments over the tenure of the next 12 months)
Understanding Underwriting In Merchant Cash Advances
If you’re planning to apply for an MCA or an alternative business loan, you’ll need to know how underwriting functions and your estimated cost of funding so that you can shop around.
What Are the Grades for MCA Papers?
There are around four major paper grades in the market, which are grades awarded to your firm depending on your risk profile, which is assessed by various indicators such as credit card sales or credit ratings.
They’re used to figure out how much a company should be approved for, what terms or payback cycles should be employed, and what cost elements to use when pricing an offer.
A paper with an “A” grade is considered to be of the highest quality and poses the least danger to the borrower, whereas a paper with a “D” mark is considered to be of the lowest quality and poses the greatest risk to the borrower.
What Factors Go Into Determining Paper Grades?
In the viewpoint of the lender, the merchant’s present standing in the categories below will impact how their profile is viewed:
- The type of business that the merchant is in;
- If the merchant is a small firm that operates from home;
- The owner’s personal credit score and the company’s credit score;
- The number of non-sufficient funds (NSFs), overdrafts, and bank balances that are negative on a daily or monthly basis;
- Existence of Tax liens, judgement liens, and bankruptcy filings are (and their status is unknown);
- Existing merchant cash advances and/or alternative business borrowings (and their status);
- Payments to a corporate landlord or the status of a business mortgage
Paper Grade Merchants
These are merchants with a decent FICO score (typically 650 or above), a good business credit profile, tidy bank statements, no liens, no landlord or loan issues, a separate business site, and an existing cash advance or alternative business loan that is in good standing and can be paid off at closure- if there’s one.
Determining your Paper Grade
We all would like to get an “A” grade, just like folks want to get an “A” on a school paper. While determining whether you are a B, C, or D grade can be tough on your own; there is a way of finding out getting an A grade:
- Check your credit ratings, both personal and corporate. Do not Anticipate A paper quality pricing if your personal credit score is less than 650.
- If you’ve had more than five non-sufficient funds (NSFs) in the last three months, you won’t be eligible for the best rates.
- Expect “A” paper quality pricing if you know you have a pending tax lien.
Merchant Cash Advances aren’t the only type of capital funding available to entrepreneurs.
Even if your company has the highest rating, they sometimes come at a hefty cost, despite the ease and speed they provide.
Before you sign on the dotted line, make sure you’re aware of other accessible business finance choices and which one best suits your company’s needs.
Do you own an MCA Business? Looking to grow? Schedule a demo with us today!
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