Wikipedia states that a merchant cash advance was originally structured, as a lump-sum payment to a business in exchange for an agreed-upon percentage of future card based sales. The cash advances are not exactly loans but a portion of future card sales, sold to third party beforehand. The companies working in this periphery are gazing the clients of the small business factoring companies. They operate in a fairly large unorganized market and their interest rates are quite high compared to others in the lending market.
These have a diversified distribution channel and this can be attributed to their growth. The small businesses on lookout for credit, find MCA a better option as it provides greater flexibility to them. The sales volume determines in the payments to MCA and offers elasticity in cash flow management in case of seasonal businesses. The credit process is faster and serves borrowers by giving faster access to business capital.
Merchant cash advancers initially started with the factoring the credit card sales. The size of sales of small operators is small and so is the loan amount. This way the risk associated with the invested was manageable for most MCAs. The insurgence of technology in banking and finance led to changes in payments also. Apart from credit card sales, merchants have cash and debit card sales too. And this led to a crowded market for any substantial growth. The new domain to explore is the B2B and B2G transactions.
The documentation process with MCAs is simpler which makes on boarding easy for merchants. Apart from regular card payments the merchants have moved to refinancing of the larger factoring clients. Their business mechanism helps generate regular flow of funds, even when you are trapped in debt. They do not care about the other lien holders and related issues, just need the comfortable daily account balance to finance your business. They help businesses generate funds external to their credit worthiness.
The major concern for any merchant going in for MCAs is that they don’t abide by the laws and regulations. The MCAs are backed by the large private equity funds and have a bigger risk appetite.
Source:- http://www.lendclouds.com/blogs/merchant-cash-advance-new-class-of-finance
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