MCA stands for Merchant Cash Advance – you can Google it and learn a bunch of information about the products, the process, and how businesses utilize them. You may have seen or heard advertisements about companies such as On Deck Capital or Kabbage. In short – these companies lend small businesses short term capital at high interest rates. Most look to lend “opportunistic” capital – meaning that they are only interested in lending to companies that have an “opportunity” in hand – not ones that need to meet payroll or pay the rent.
For example – consider a small roofing contractor that has a contract in hand for a large and potentially profitable job. But he needs $25,000 for material and he does not have access to that amount of traditional credit. He may look to MCA vendors to supply the capital even though the interest rate will be much higher than a traditional banking product. These notes are paid back mostly over short durations – such as 100 business days. Most MCA vendors have their borrowers make daily payments over the holding period.
Unlike traditional bank underwriting where the loan officers are engaging in a deep due diligence process as they try to access the strength of the borrower – the MCA process is much simpler as the underwriting looks to answer one question – does the borrower have the ability to make daily loan payments – most through direct withdrawals from their business checking account – over a set number of business days such as 100. Loans can be funded in as little as 48 hours making the MCA concept attractive to small entrepreneurs.
These lenders need to capital to operate – that is where some of our clients come in. Today the terms offered to clients who are willing to provide capital to these lenders are short term (now as little as 9 months) and they offer attractive interest rates in the low double digits. Interest can be paid to investors monthly or at the end of the term. They can be held inside and outside IRAs and offer a way to diversify portfolios while providing very competitive returns.