Commercial interruptions linked to the coronavirus pandemic and its variant-borne waves have prompted many small to mid-size enterprises (SMEs) to seek merchant cash advance software, either to see them through lockdowns or to help them expand e-commerce operations and allow commerce to continue even when storefronts are shuttered.
An MCA, effectively a form of “business factoring” is a lump-sum that’s exchanged for a set percentage of the borrower’s sales receipts, with daily payments made over periods, typically, of less than two years. Often structured as a sale of future revenue cleared and settled via credit and debit cards, MCAs aren’t technically loans, but investments. Further, with advances in financing technology, businesses can now offer, process, and manage MCAs as a B2B offering with bank-grade credit-decision accuracy and end-to-end MCA automation that doesn’t need the participation of bank-card processors or hinge on card receipts at all.
Before we proceed, would you (or your team) like this case study on Merchant Cash Advance automation to provide SMEs and gig-workers access to specialized finance.
Other “not a loan” characteristics of MCAs are:
- No requirement for collateral or personal guarantees
- No liens may be imposed for failure to repay (but breach-of-contract suits may result)
Further, MCAs aren’t governed by interest rates, but by “factor” rates. So, if an MCA provider advances $10,000 to a business at a factor rate of 1.2, the business must pay the MCA provider $12,000. If the factor rate of 1.3 in the same scenario, the MCA provider is entitled to $13,000 from the business, and so on.
Critics of MCAs maintain that factor rates can be extremely high, even for unsecured funding. Others say the case legal disputes over MCAs can lead to nasty entanglements, with the case law not quite settled.
The main attraction of MCAs to businesses, even where repayment rates are higher than for some traditional loans, lies in their flexible approval requirements, faster turnaround, and shorter terms, says Dmitry Voronenko, co-founder and CEO of TurnKey Lender, a lending loan-management technology provider with operations in more than 50 countries. “It’s a way to get out in front of the competition,” he adds. “For small businesses looking to gain a competitive edge through expansion or digital transformation, especially where traditional loans are unavailable or take too long to secure, MCAs can be the answer,” he adds.
In the UK, requests by online businesses for MCAs rose 47% in 2021 over 2020, according to one vendor — with the average advance up by 35% in the same period.
Globally, the MCA market — spurred by improvements in financial technology and SME demand for short-term cash infusions — is expected to hit $1.4 trillion by 2028 for a compound annual growth rate of 15.5% through the previous 10 years.
A robust platform built specifically for the needs of MCA providers and the businesses they serve
The Merchant Cash Advance version of TurnKey Lender’s financing-software suite is engineered with the underlying MCA business model in mind, with all flexibility, intelligence, and scalability of its loan-management offerings, along with MCA-specific characteristics including:
- Differentiated MCA terminology
- Customer portal tailored to the MCA business model
- Calculation options that accommodate MCAs
- Advanced factor-rate settings
- Revenue visibility
- A new calendar for tracking contributions on business days only
- Expansion of Plaid integration and integration of Dwolla-facilitated ACH and RTP
- MCA debit forecast and collections
“We equip MCA providers with a cash-advance solution that makes a difference to online enterprises and other businesses where it really matters,” says Voronenko. “That means reaching fast and accurate financing decisions using award-winning artificial intelligence, so our clients can sidestep cumbersome paperwork, avoid human error by putting collections on autopilot — in an environment, by the way, that features all MCA-management tasks on one platform
Drilling down on TurnKey Lender’s MCA solution, the fintech offers cloud-based functionality that includes:
- MCA-centric financing-application flow based on MCA use cases and top MCA verticals, scalable to everything from multinational companies to gig workers. 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.
- A built-in MCA decision engine that leverages proprietary machine learning algorithms and deep neural networks to process real-time and historic bank statement data in addition to a configurable array of alternative scoring inputs. Big data and AI ensure speed and accuracy in risk evaluation and finance decisioning.
- By establishing an optimal factor rate with a few clicks, MCA providers can streamline revenue generation using the MCA edition of TurnKey Lender, which includes industry-specific advance calculations that allow for fully automated collection of contributions at scale directly into your company’s account.
- Analytics from performance and behavioral data allows MCA providers to safely extend multiple o options when it comes to the factor rates, remittances, and payment schedules.
- A payment-scheduling engine that lets you charge for contributions only on business days, making for better (and more enduring) customer relationships.
- A white-label online portal that gives customers a central location for conducting their MCA business with you.
- Software that’s preconfigured to integrate with payment providers, bank account verification, email and messaging, accounting services, CRMs, and credit bureaus.
- Deep customization capabilities (using flexible and intuitive interfaces) that don’t require source-code editing. Switch between devices and environments without missing a beat.
- Integration with current infrastructure through a powerful and time-tested “API client” (set of tools and protocols that operate from an application) that allows for targeted coding around making requests or monitoring responses.
Cash-flow problems can hit SMEs with particular force, says TurnKey Lender’s Voronenko, pointing to a US Bank study that shows 82% of small-business failures come down to their being cash-strapped, often temporarily.
“That said, MCAs aren’t for all businesses in all scenarios,” adds Voronenko. “But for high-volume businesses with lots of card transactions, an MCA can be a good way to cover short-term gaps in funding — and a scalable MCA technology suite like ours is a great way for MCA providers to manage their businesses and keep their customers happy.”