Merchant Cash Advance Providers Need Software From an Alternative-Financing Automation Specialist

Digital Lending

A business that requires cash quickly can get it on the fly if approved for a merchant cash advance. And approval isn’t rare. According to the US Federal Reserve, 84% of MCA applications got a thumbs up in 2020.

MCAs are credit products in which payment of set amounts are made over time from a fixed percentage of the borrower’s daily sales receipts. For example, a business that gets a $25,000 MCA might have to pay a total of, say, $30,000 via automatic draws of (let’s say) 10% per diem.

As a means for extending credit, MCAs fall under the broad rubric of “alternative lenders” — or, for reasons we’ll soon explain, maybe it’s best to call them “alternative financiers.” By the end of 2021, these funders will see a worldwide total transaction volume of around $341 billion in a market where the average transaction size is well under $6,000, according to one recent study.

Despite all this activity, one industry source says there’s about 30% more demand for alternative financing than there is supply. For businesses, the gap is even wider.

Learn about the Merchant Cash Advance Solution by TurnKey Lender.

Sidebar, your Honor: Courts rule MCAs are something else

As you may have guessed, MCAs are among those alternative credit products that aren’t really loans — a point that’s been made and successfully defended more than once in court.

In a 2016 response to a claim that an MCA provider was “civilly and criminally usurious” in its dealings with a limousine company, a New York Supreme Court justice found the claim to be meritless because a cash advance on future sales isn’t a loan. Reviewing the agreement between Platinum Rapid Funding Group and VIP Limousine Services, the court found “usury laws are applicable only to loans or forbearances, and if the transaction is not a loan, there can be no usury.” The court added that repayment requirements aren’t usurious simply because one party comes to view them as “onerous.”

Boiled down, the New York court held that when an MCA recipient has trouble making payments in accordance with the MCA agreement, it’s not the MCA provider’s problem. Could an unexpectedly protracted payment period — say, because sales have been slow — have the effect over time of a usurious interest rate? Yes, but that’s beside the point because, again, the transaction in question isn’t a loan, and so “usury” isn’t possible.

A 2018 decision by another New York Supreme Court justice upheld this view, and, by some accounts, has settled the matter once and for all.

Fed: MCAs have an important place in B2B funding landscape

The Federal Reserve also seems to regard MCAs with equanimity. For the Fed, these instruments are part of a vital ecosystem — along with short- and fixed-term loans, and lines of credit — extended by lenders that “provide small-dollar credit for small businesses.”

That these B2B credit providers generally aren’t subject to “Truth in Lending” rules that apply to consumer credit products is, in the Fed’s eyes, a matter more for caution than prohibition.

In fact, the US central bank’s view on MCAs is nothing if not practical. “Small businesses account for 99.9% of all U.S. firms,” nearly half of private-sector employment, and 44% of total private-sector output, according to the Fed. With numbers like these in play — and with “less than half of small businesses” reporting that their credit needs are being met — the Fed views MCAs simply as an alternative (and much-needed) means among several others for securing business capital.

Funding, lending: Whatever you call it, the tech is the same

“When it comes to MCAs, we’re always happy to show both sides of the coin,” says Elena Ionenko, co-founder and operations chief for lending software maker TurnKey Lender. “They often come into play for micro-businesses — think Uber drivers and other new-economy entrepreneurs — that need help over temporary obstacles by means of a fixed-percentage split of daily revenue, which for most MCA applicants is a safe and sensible way to secure a short-term cash infusion without incurring additional interest payments.”

“Because of this,” adds Ionenko, “the technology MCA providers need to assess, process, manage, and analyze credit extensions falls directly into our wheelhouse — in fact, we already have a track record of meeting their tech needs.”

When it comes to alternative “lending,” a category that includes MCAs, TurnKey Lender has elsewhere observed that terms like “funding” and “financing” make more sense. From the technical perspective of a financing-software maker, however, even this distinction is moot.

It’s also useful to know that the customers of MCA providers often take several cash advances a year — and of course, repeat customers contribute more revenue per account because they reduce sign-up and processing costs.

What a white-label funding platform can do for your MCA business

Additionally, these customers tend to pose less portfolio risk. For this reason, MCA providers should have a financing platform that can capture these savings and help maintain ties to past customers on an ongoing basis.

While MCA specialists tend to dominate the space, potential new entrants to MCA funding include businesses that already serve other very small businesses — think truck stops, last-mile warehousers — and have a good understanding of the business types they’re financing. This familiarity can prevent a financier from throwing good money after bad.

That said, experience and intuition aren’t nearly enough to support a smart MCA business. With a state-of-the-art financing platform, MCA providers should be able to count on the following attributes.

  • Configurable MCA finance application flow

Financing-application flow is based on MCA use cases and suits the key verticals of the merchant cash advance industry, whether with gig-workers or large merchants. The applicant describes their business, income structure, and any other relevant details required for making an informed decision on the business performance in the future. This information is then used to determine the advance amount and the profits’ percentage to be charged on a daily/weekly/monthly basis.

  • MCA scoring based on bank statements and traditional sources

The built-in Merchant Cash Advance Decision Engine utilizes proprietary machine learning algorithms and deep neural networks to process vast amounts of real-time and historic bank statement data as well as other scoring inputs. Big data and AI under the hood of TurnKey Lender ensure unmatched speed and accuracy in risk evaluation and finance decisioning.

  • Flexible factor rate and contributions collection management

Streamline revenue generation through establishing an optimal factor rate automatically or manually in a matter of clicks. The MCA edition of TurnKey Lender includes industry-specific advance calculations that allow for fully automated collection of contributions at scale directly into your company’s account. The payment scheduling calendar lets you charge contributions just on business days or postpone payments if a customer needs it – everything you need to build better relations with your clients.

  • Extend multiple advance offers to clients

Use the intel from the data collected and processed by our software to extend multiple offers and provide potential clients options when it comes to the factor rates, remittance, and payment schedules. The client will see them in a white-labeled personal portal where all their business with you will be conducted.

  • Pre-configured integrations for a unified merchant cash advance

The software you get is pre-configured for integrations with payment providers, bank account verification, SMS/email, and accounting services, CRMs, and credit bureaus. In addition, TurnKey Lender has a Dwolla Contributions integration and an extended bank statement scoring services integration for business performance analysis

  • Deep no-code configuration of a cloud-based software

The solution allows for deep customization without the need to edit the source code of the system. TurnKey Lender puts complex MCA processes into flexible and intuitive interfaces. The cloud-based platform allows for both your clients and employees to seamlessly switch between devices and environments without skipping a bit

  • Robust API readiness to integrate with existing infrastructure

A powerful API client allows you to integrate your TurnKey Lender instance into your business infrastructure as well as connect any required third-party data providers and products to your software in a meaningful way

More TurnKey Lender features developed specifically for the Merchant Cash Advance industry.

“MCA financing is in demand because many small businesses are happy to exchange a set percentage of sales for a relatively small lump-sum cash advance,” says Ionenko. “At Turnkey Lender, we know the challenges MCA providers face, and we’re proud to help them and others succeed, wherever, and in whatever verticles they find themselves.”

See Merchant Cash Advance Solution by TurnKey Lender in action and start offering advances to your clients with the market-leading automation provider.

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