medium · Asset-Backed Securities asset-nuances
Merchant Cash Advance (MCA) ABS is considered a high-yield 'esoteric' asset class.
What is the primary analytical challenge in modeling the cash flows of an MCA pool compared to a traditional small business loan pool?
- The primary risk in an MCA financing structure is the 'SBA Guarantee' being suddenly revoked by the federal government if a merchant fails to maintain adequate hazard insurance.
- MCA repayments are a fixed percentage of daily sales, meaning they have no fixed maturity or scheduled principal; duration is entirely dependent on the merchant's future revenue velocity.
- MCA advances are typically characterized in filings as being backed by physical inventory pledged as collateral, requiring a formal 'Liquidation Value' appraisal for every borrower.
- MCA pools are generally subject to strict contractual 'Defeasance' provisions that legally prevent a borrower from paying off the outstanding balance early without first purchasing Treasuries.
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