Traditional lending has had centuries to refine its underwriting, giving rise to the well-known 5 Cs of Credit for assessing risk.
But alternative funding solutions, especially merchant cash advances, don’t fit neatly into this decisioning framework.
With many MCA providers still relying on outdated, loan-based methods, the time has come for a fresh, purpose-built underwriting approach that reflects MCAs’ unique nature.
In this article, we’ll introduce the 3 Rs of MCA funding—a modern framework designed specifically for providers working with SME merchant applicants.
Read on for a breakdown of each pillar, plus how modern technology can help your MCA funding operation unlock key insights in real-time.
The Traditional 5 Cs of Credit
In the world of traditional lending, institutions have commonly used the 5 Cs of Credit as a guide for evaluating risk and creditworthiness.
But this framework doesn’t really hold up when applied to fast, flexible financing solutions like merchant cash advances.
Indeed, since this type of alternative funding is fundamentally different to traditional loans, the 5 Cs are largely irrelevant to MCA underwriting. Here’s how:
- Character refers to credit history, with lenders heavily relying on FICO scores to determine eligibility. But with MCAs, rather than dwelling on the past, decisioning shifts from the individual’s financial history to an enterprise’s operational performance—specifically, its current cash flow and future sales.
- To qualify for a traditional loan, applicants often need collateral like equipment or property. This isn’t the case with merchant cash advances, as they are unsecured. And because repayments come automatically from a portion of future sales, there is no requirement for physical assets.
- Capacity is another mismatch. Banks typically evaluate a borrower’s repayment ability by comparing their debt to income ratio. Conversely, MCA funders look at the SME’s projected daily or weekly revenue, and enable repayments to fluctuate with sales.
- Traditional lenders perceive personal investment or strong net worth, aka capital, as an indicator of lower risk. But with MCAs, providers prioritize consistent revenue over the applicant’s personal financial stake.
- Finally, there are conditions. Loan approvals are often delayed or denied due to economic trends, industry volatility, or seasonal downturns. Conversely, MCA funders place more importance on recent business performance versus broad market conditions. Moreover, MCAs can be used for any purpose the SME desires.
At Onyx IQ we’ve said it many, many times—merchant cash advances are not loans. They’re legally and structurally distinct from traditional lending, with funding based on future receivables, not debt.
That’s why a different set of underwriting metrics makes much more sense for this space.
The Modern 3 Rs of MCA Funding
Merchant cash advance funders need a model built for real-time business dynamics—something that reflects how small and mid-sized enterprises (SMEs) truly operate, so providers can properly evaluate them.
This is where the 3 Rs come in:
- Revenue
- Rhythm
- Reliability
Compared to the 5 Cs, these three pillars offer a more accurate, data-driven framework for assessing SMEs in the MCA space—focusing on the flow of money, the consistency of that flow, and the broader trust signals from the enterprise.
Revenue: Sales Volume and Earning Power
This pillar looks at how much an SME earns, finding answers to questions like:
- Is the enterprise generating enough total income to support SME funding?
- Are gross and net sales aligned with the requested MCA funding amount?
- Does sales volume suggest healthy customer demand?
Unlike traditional lenders who may only look at static figures or historical tax returns to gauge revenue, MCA providers look at what’s happening right now by analyzing:
- Total deposits, whether daily, weekly and/or monthly.
- Gross vs. net sales, to identify chargebacks or refunds.
- Payment processor data, to understand debit/credit card transaction size and frequency.
For example, let’s say a merchant earning $15,000+ in sales each month has solid revenue. Even if deposits are irregular, the enterprise may still generate the raw income needed to qualify for a merchant cash advance.
In essence, the revenue pillar measures sales strength—not just when money comes in, but how much is being brought in over time.
Rhythm: Timing, Cadence, and Cash Flow Stability
Since MCA repayments must be made regularly, the rhythm pillar assesses how frequently money moves through the SME:
- Are deposits spaced out evenly, or in random bursts?
- Is there a regular flow to incoming funds?
- Can the SME handle daily/weekly withdrawals without overdrawing?
To get the answers they need, MCA funders can look at:
- Bank deposit timing, to determine whether funds are hitting the account daily, weekly, or in occasional spurts.
- Processor frequency, to assess the cadence of debit and credit card transactions.
- Seasonality or revenue gaps, which may affect repayment flow.
As an example, a small restaurant with dozens of daily card transactions would show solid rhythm, even if they only had modest overall revenue. Conversely, a contractor making $15,000 per month from two large invoices could face cash flow struggles between payments.
So, while revenue reflects overall earning power, rhythm is about timing and consistency—how often income arrives, and whether that flow aligns with the recurring structure of merchant cash advance repayments.
Reliability: Financial Behavior, Data Integrity, and Operational Trust
Finally, reliability is about determining how trustworthy and financially disciplined the SME is, and how well the applicant manages its day-to-day finances.
This pillar considers questions like:
- Does the SME merchant maintain healthy banking behaviors?
- Are there any signs of financial stress or mismanagement?
- How long has the SME been operating with verifiable, consistent activity?
MCA funders typically assess reliability through signs like:
- NSF (non-sufficient funds) activity and overdraft history.
- Average daily balances, including how often accounts dip into critical lows.
- Chargebacks or disputes that may suggest instability with customers or transactions.
- Time in business and consistency of deposits over extended periods.
For example, a merchant with three or more years of consistent bank activity, stable balances, and clean records would demonstrate high reliability. Alternatively, an SME with frequent overdrafts and unexplained data gaps may raise red flags, even if their revenue is strong.
Ultimately, the reliability pillar assesses an SME’s credibility and operational maturity to maintain repayments over time, even if sales fluctuate.
The Role of Technology in the 3 Rs
The 3 Rs offer merchant cash advance providers a clearer, more aligned way to evaluate eligibility for SME funding.
However, this framework only works when it’s powered by real-time data and insights.
To effectively assess revenue, rhythm, and reliability, MCA funders need a clear, continuous view of what’s happening in the merchant’s operation today—not last quarter.
That’s where technology steps in, bridging the gap between what a merchant claims and what’s actually happening across their SME. For example:
- By means of API integrations, smart platforms can pull and combine live deposit data from all kinds of business bank accounts and payment processors, enabling you to instantly view daily, weekly, and monthly sales, compare gross vs. net income, and flag any major fluctuations in income.
- Automation helps map out deposit timing and transaction frequency. You can quickly spot if a business has a consistent pattern, or if they’re relying on irregular, high-dollar spikes that may not support daily repayments.
- Automated data feeds also help you track NSFs, overdrafts, chargebacks, and average balances, providing a behavioral snapshot of how effectively SME merchants manage their cash.
- With the help of optical character recognition (OCR) and intelligent parsing, modern software can extract insights from scanned documents, eliminating the need to flip through PDFs or rely on error-prone manual data entry.
Built by SME funders for SME funding, the Onyx IQ platform connects to a merchant’s financial ecosystem, giving MCA providers instant access to measurable insights via real-time, accurate data.
No need to juggle disconnected, siloed tools. Rather, with Onyx IQ, you get everything you need to assess revenue, rhythm and reliability in one place.
Even better? As MCA disclosure requirements continue to tighten in states across the U.S., Onyx IQ software helps automate the tedious and time-consuming process of compliance so you can avoid potential penalties.
Modern MCA Decisioning, Powered by Onyx IQ
With the merchant cash advance industry rapidly evolving, staying ahead means more than just offering flexible funding. It also requires adopting smarter underwriting processes that reflect today’s dynamic business realities.
Indeed, the most successful MCA funders will be those who embrace this evolution throughout strategic scaling—integrating both innovative frameworks and cutting-edge technology.
The 3 Rs—revenue, rhythm, and reliability—provide a tailored, data-driven foundation for assessing SME funding merchants in real time. Paired with Onyx IQ, those insights become immediately actionable, and even transformational.
Ready to transform your underwriting and stay competitive in this fast-moving market? Book your Onyx IQ demo today to see the difference real-time data intelligence can make.
