Rates vary greatly in the lending world, from "prime" rates on mortgages, all the way up to high interest credit cards and, you guessed it, the ever-popular financial vehicle known as the merchant cash advance.
MCA's are a special vehicle indeed, in the sense that they are weighed on a combination of variables not otherwise studied similarly with other loan products. Very little weight is placed on your personal credit score (as heavily advertised by pop-up shops screaming "bad credit OK") and typically, having neither a great credit score NOR collateral assets would preclude one from getting financing of any kind. But then there are the MCA's... There when you need them, but the capital isn't cheap.
"How you figure!?"
Even in the world of MCAs, rates vary greatly, but what goes into that secret sauce, that magical algorithm, that actuarial wonder that is the underwriting process? The answer is a multitude of things.
Essentially, as with the calculating of most interest rates, underwriters are looking at the likelihood of default. The higher the chances that you can't or won't pay, the higher the factor rate. As an example, U.S. treasuries pay next to nothing, since there's not a huge chance that the U.S. government is going out of business any time soon. Like they say, "scared money don't make no money" (I bet my co-founder that I would put that in this piece).
Here are some of the ingredients in that secret sauce...
- Revenue versus the amount borrowed - The lower the amount you borrow as a percentage of your monthly revenue, the more comfortable lenders are likely to be about your ability to pay back smoothly.
- Revenue trend - Seeing a solid uptrend in revenue is always a plus when evaluating creditworthiness.
- Negative days in your business bank account - Every negative day your business bank account was negative is a tiny little red flag to potential lenders. You can get away with a bunch over months' time, but too many will put you on the high end of the rate spectrum, and too too many may preclude you from funding altogether.
- Your industry - Different industries have different variables and varying levels of risk at that, so some lenders avoid entire industries altogether, or may offer different rates based on different levels of risk etc. Everything from seasonality to accounting comes into play with this one. Some lenders also avoid certain industries that go against certain moral and ethical values (think smoke shops, sex shops, alcohol, gambling etc.).
- Your personal credit- We all know you can get a merchant cash advance with even downright bad credit, but it does make a difference. Your score can impact the rate to a certain extent, and certain incidences like financial crimes or even a DWI can affect the confidence that underwriters have in your file prior to funding to the point where some underwriting teams may even decline to make an offer.
- Having a past default/judgement - Not surprisingly, seeing a judgement from another lender will scare off many lenders. Surprisingly, merchants have been known to be able to receive funding despite previous judgments, although it's not a positive thing for the resulting rates and terms offered.
- Number & sources of deposits, credits and deductions - Multiple deposits give lenders a greater feeling of security when not all of your business is coming from just one or a couple clients. If you have transfer accounts that funds come in or go out from, you may be asked to show statements on those as well.
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