A merchant cash advance (MCA) was originally structured as a lump sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales.
The term is now commonly used to describe a variety of small business financing options characterised by short payment terms (generally under 24 months) and small regular payments (typically paid each business day)
A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met.
With rising penetration of UPI QR Code, the MCA has found its place with UPI merchants too.
How large is the opportunity?
Market size and growth:
How big is the current market for MCAs in India? (Estimated around INR 10,000 crore)
What are the projected growth rates in the coming years? (Expected to grow at a CAGR of 30-40%)
What are the factors driving this growth? (Rising SME sector, increasing adoption of digital payments, etc.)
Key players and trends:
Who are the major players offering MCAs in India? (Bajaj Finserv, Axis Bank, Indifi, RazorpayX, etc.)
What are the emerging trends in the market? (Focus on technology, data-driven underwriting, flexible repayment options, etc.)
How UPI QR code is fuelling growth of daily instalment based merchant cash advances?
There are 300 million UPI merchants in India
There are nearly 8 million POS touch-points in Indian
Daily instalment (EDI) with weekly holiday has become a popular product amongst merchants due to following reasons
Reduced stress: Repaying in small amounts on a daily basis reduces the pressure on your finances as no lump sum payment needs to be made for EMI.
Auto recovery everyday from settlement amount, implies less worries about missing out on instalment dues.
Less Total Interest Payable - as daily retained amount also acts as a prepayment / amortisation of principal amount
FinTech players like BharatPe, PayTM, Razorpay have found good success with EDI through their banking and NBFC lending partners
Popular loan product constructs for Merchant Cash Advances?
#1 Daily instalment billing: Generate EDI schedule similar to EMI with weekly holiday
Instalment is billed on a daily basis
There is a concept of grace period
Any breach beyond the grace period results in penalties and DPDs
#2 Daily pre-payment(Fixed amount) but monthly EMI billing: Consider daily retention of some amount as pre-payment of the EMI loan
Instalment is billed on the monthly basis
Everyday pre-defined amount is deducted from the settlement amount and considered as payment received for pre-payment
DPD computations and penalties happen as per monthly schedule
#3 Daily pre-payment(Variable amount) and bullet repayment billing : Bullet loan with daily pre-payment as share of receipts
Certain pre-agreed percentage of daily receipts in the POS machines / merchant accounts is considered as repayment towards the loan
Principal reduces by a variable amount everyday
Interest is computed daily based on outstanding principal amount
Deduction from settlement amount is the key for this product's success
This product can work successfully only in scenarios when the lender has control in the payment settlement process.
Hence most lenders can't offer it without partnerships with the platforms
Which platforms should the lender tie up with? Below is the list of possible platforms where settlement can be controlled
UPI QR code merchant acquirers
FinTechs - PayTM, PhonePe, BharatPe,
Banks having their own merchant acquisition - ICICI, HDFC, AU Bank, SBI
Marketplaces like - Amazon, Flipkart, Meesho
PGs like Razorpay, Billdesk, Worldline
POS machines providers
How can Synoriq LMS help lenders manage MCA daily deduction loans?
Synoriq is world's best loan management system with widest possible product coverage. Synoriq offers a complete LMS solution to help you get quickly started
Support for all possible product constructs
#1 Daily instalment billing:
Native capabilities to generate EDI schedules
Ability to accommodated weekly/monthly holidays when the installment should be skipped in the RPS
Ability to specify custom holiday schedule for any loan
Sample repayment schedule of EDI is pasted below
Receipt allocation of dues in FIFO for all the installments dues
Ability to define receipt allocation sequence IPC or CIP etc
Define grace period
DPD calculation on daily basis
Bounce charges configurations - immediately on bounce or after grace period
Asset classification as per DPDs
Ability to redraw repayment schedule on lump-sum payment (Part payment)
Ability to manage limits and allow further drawdowns
Ready download of repayment schedule with daily principal amortisation for the customer
#2 Daily pre-payment(Fixed amount) but monthly EMI billing
Repayment schedule is generated as per monthly instalments
Daily retention amount is specified in the LMS
Everyday daily retained amount is considered as part-payment and repayment schedule is redrawn such that the impact comes only on the next EMI amount and not on the rest
Ability to handle lump sump part payments
Instalment billing happens on monthly basis, dues are generated only on EMI due dates
If all retained amount is serviced then ideally EMI amount should be close to zero i.e. same as daily retained amount
No penalties on missing daily retention amount
Penalties only on missing the monthly payment date
Overall interest costs are lower as outstanding principal is adjusted every day
#3 Daily pre-payment(variable amount) and bullet loan
Create a bullet loan with repayment of principal and interest on the maturity date
Compute the variable payouts on a daily basis and upload them as receipts in the LMS, system would auto reduce the POS on a daily basis
Interest accrual on a daily basis
Possibility of monthly billing of interest amount
Ability to adjust receipts against interest billing