The number one most commonly asked question we get is some variation of “What actually is a merchant cash advance?“ or “How does a merchant cash advance work in practice?”
This blog gives an in-depth answer offering granular detail of the entire process from start to finish.
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How does a merchant cash advance work?
First, a business owner thinks “I need small business financing”, so they search for a website to find a loan.
Once they have found a website that looks good, the merchant will type in their details. For example: “I’m in the trucking industry. I need $50,000 and I have $50,000 in monthly sales.”
The information then becomes a lead into an Independent Sales Organisation’s website. The ISO specifically exists to help broker exactly these types of loans.
The ISO representative will then call the merchant and talk to them about their needs. During this conversation, the ISO rep asks the merchant for information like bank statements, certificate of incorporation, Etc.
Once this paperwork has been provided, the ISO rep takes that newly qualified lead and delivers the information to a Merchant Cash Advance funding company.
The Merchant Cash Advance funding company
It is the MCA funding company that actually makes the underwriting decision.
In order to make this decision, the MCA funder carries out a deep dive into the credit history of the underlying merchant.
They will look into the company bank statements as well as into the individual who’s behind that business. Full due diligence is carried out and all necessary background checks are completed by this funding agency.
Once this phase is complete, the MCA funding company will make a decision on whether our trucking merchant with $50,000 per month in sales looks like a good risk.
Let’s assume they decide yes, they want to fund this business. The MCA funder will create a bespoke offer for x amount of dollars and indicate what factor or interest rate is that they are prepared to offer.
Next, the funder returns that offer back to their partner in the independent sales organization, who, in turn, passes it on to the merchant.
At this point, the merchant can take it or not take it, or try to negotiate the terms of the loan.
The MCA is agreed
Let’s say the trucking company decides right away that it’s a good deal.
The merchant confirms that they are happy with the terms of the advance, and the contract then gets written between the merchant and the funding company.
The ISO company is not involved in this contract as they are only responsible for originating the advance.
MCA funding companies often partner with other institutions in order to build the availability of capital which they can then use to extend advances to more merchants.
Supervest partners with over twenty merchant funding companies through our platform.
Our specialist team has conducted rigorous due diligence on all of these funding companies, and only the organizations that pass the highest quality thresholds make it onto our platform.
At this stage, our MCA funding partner will come to us with the deal metrics; things like time in business, type of Industry, the FICO of the merchant, etc.
When we accept, then the funding company will input the deal details into our platform.
This is where you come in
It is at this point that our platform users can see the opportunity and decide whether they would like to invest in this particular merchant cash advance.
In our self-invested model, our platform users set up profiles indicating their risk appetite and the parameters of the kinds of deals they are interested in.
We have a unique matching engine that matches investors with incoming deals that meet their requirements.
For one new MCA deal that arrives through Supervest’s platform, there might be a hundred investors that match anywhere from fifty dollars to five thousand dollars per person.
Once they are securely invested in the deal, then the MCA funder sends out fifty thousand dollars to the merchant.
The merchant’s repayments on that cash advance begin the very next day.
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