hard · Asset-Backed Securities
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 is the 'SBA Guarantee' being revoked by the government if the merchant fails to maintain 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 loans are backed by physical inventory, requiring a 'Liquidation Value' model for every borrower in the pool.
- MCA pools are subject to 'Defeasance' rules that prevent the borrower from paying off the balance early without purchasing Treasuries.
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