07 Oct How Merchant Cash Advance (MCA) Underwriting Impacts Your Approval
When you apply for a business merchant cash advance (MCA), you may feel like Dorothy approaching the Wizard of Oz. It can feel overwhelming and nerve-wracking when someone uses a mysterious procedure to decide whether or not to approve your request. But the underwriting process isn’t magical and doesn’t need to be mysterious.
Underwriting is the most powerful force behind any merchant cash advance. Understand how alternative business lenders evaluate your MCA application to avoid missteps, increase approval odds, and secure better terms.
What Is the MCA Underwriting Process?
In underwriting, lenders evaluate the risks of lending money to your business. MCA providers review your business’s financial profile to decide whether you’re a good candidate for funding and what terms to set for the merchant cash advance.
MCA underwriting prioritizes speed and flexibility. You usually hear back about your application in 24 to 72 hours, though unclear or incomplete documentation delays the process. Approval for a cash advance is more flexible than traditional loans since providers examine different metrics. Your credit score, for example, ranks as the least important financial data in the MCA underwriting process.
Here’s a closer look at the key factors MCA providers use to evaluate your finances:
1. Revenue Patterns
Your sales volume is the foundation of your MCA evaluation. Lenders want to see that you generate consistent cash flow to repay the borrowed capital. They will look for stable patterns in your daily and monthly income to determine the risk of lending to you. This also helps them set the amount and interest rate.
2. Credit and Debit Card Sales
You typically repay merchant cash advances through a percentage of your daily, weekly, or monthly card sales. Providers assess how many of your business’s transactions involve credit or debit cards as a key part of the underwriting process. The ideal applicant has a high volume of sales with very few chargebacks.
3. Bank Statements
Underwriters analyze bank statements for deposits, average balances, overdrafts, and any irregularities that suggest poor financial management. Expect to provide documentation for at least the last three to six months.
4. Existing Debt Obligations
Stacking multiple loans or MCAs can be a red flag. Underwriters want to make sure you can realistically manage the new payments. If you already have several repayment obligations, a new MCA provider might charge a higher borrowing rate or decline your application.
5. Business Type and Industry Risk
Some industries are considered riskier than others. For example, seasonal businesses may struggle to get approved or may receive higher factor rates. The underwriting team looks at your industry trends to evaluate potential trouble.
6. Time in Business
Most MCA providers prefer businesses with at least a year of history, and six months tends to be the minimum requirement for operation. Longevity shows stability and allows underwriters to predict the likelihood of repayment more accurately.
7. Credit Score
Flexible lenders often approve MCAs to businesses with low credit scores. But they still review your credit history to evaluate your financial habits. Providers are more likely to offer larger amounts and more favorable terms to businesses with good scores.
What Happens After Underwriting?
Once they have evaluated your business’s finances, MCA providers will either ask for more information, decline your application, or offer you a merchant cash advance. If they ask for more information, provide any additional documentation your lender requests, and honestly answer any questions. Transparency improves your approval odds.
If you’re approved, evaluate whether the offer makes sense for your business. The MCA provider will deliver a funding offer that includes:
- The approved amount
- The cost of capital, usually as a factor rate
- The percentage of card sales for repayment, called the holdback
- The withdrawal frequency, usually daily or weekly
- The repayment term
If you get a rejection, ask the provider about the underwriting factors behind the denial. They are often willing to suggest improvements or provide information so you can adjust your approach for future applications.
How Do You Improve Your Approval Odds?
You can’t control every variable in the MCA underwriting process. Still, you can improve your finances and application to increase the likelihood of approval and favorable terms.
Improve your finances by:
- Keeping your daily and monthly cash flow consistent and stable. Try to minimize fluctuations in your sales volume.
- Lowering your expenses. You improve your profit margins with fewer costs and show that you can handle repayment.
- Avoiding overdrafts. They signal instability and risk to lenders. Schedule regular payments for when you have sufficient funds.
- Paying off existing debt. You lower your expenses and improve your debt-to-income ratio, boosting your application.
- Improving customer service to lower your rate of chargebacks. Addressing customers’ concerns more effectively will decrease the number of disputed charges on your records.
Your merchant cash advance application is another area where you can boost your approval chances. Before applying, read through all the required information and provide the necessary documentation. If you have any financial difficulties in your history, proactively communicate with your funding advisor about the circumstances and your recovery. Your transparency and preparation can show lenders you are a good candidate.
Does Understanding the Underwriting Process Matter?
Once you have looked behind the curtains at the levers and trap doors that create the illusions, you gain control over the magic. Understanding the MCA underwriting process works the same way. You become an informed applicant with the power to strategically position your finances, present your business in the best light, and improve the outcome of your cash advance.
Whether this is your first MCA or your fifth, brush up on underwriting procedures and prepare now to improve your funding options and strengthen your business’s financial future.