What Are MCA Pricing and Capital Requirements?

MCA “loan pricing” is a factor rate. MCA “capital” is the equity the originator must put next to a warehouse — not a bank CET1 ratio. The two are the same problem. A warehouse that advances 80–95% of eligible receipts still leaves a 15–30% gap once ineligibles and cash reserves are in, and that gap has a cost of equity. The factor has to pay the blended warehouse coupon, the loss you actually expect, broker and servicing, and the return that equity requires^[1,2]. For how the factor converts to yield, see MCA factor rate and annualized yield. For how the borrowing base creates the gap, see MCA borrowing base.

Why Pricing and Capital Have to Be Built Together

Desks that price off a 1.28 grid and treasuries that watch an 8.50% senior coupon are talking past each other. The senior print is not the cost of funds. Mezzanine and equity lift the true hurdle into the mid-teens, and 10 points of ineligible plus cash reserves can take an 85% advance rate down to 70% effective leverage^[1,3]. Volume is then capped by tangible net worth, not by unused commitment. If the factor does not clear that WACC after expected loss, you are originating to a loss that only shows up when the vintage seasons.

Economic Capital, Not Bank Capital

Most MCA funders are not banks. There is no standardized risk-weighted asset formula. Capital is whatever the warehouse covenants and your own loss appetite demand: a tangible-net-worth test, a minimum equity-to-pledged ratio, cash reserves in the SPV, and first-loss that stays with the originator. Rating-agency and specialty-finance warehouse criteria still matter because they are how lenders set the advance rate you live with^[5,6]. Treat that package as capital requirement even though Basel will never score it.

Who Uses This Stack

Use case: Independent MCA funders and RBF platforms that hold paper on a warehouse, shops that sell flow and keep a residual, and credit funds that bid the mezzanine. The pricing committee needs one number — required factor by expected days and expected loss — and one constraint — equity per dollar pledged. Without both, you either underprice the box or approve more volume than TNW can carry.

Key Concepts: Capital First, Then Price

1. Capital Requirement Ratio

Start from the certificate, not from the term sheet. Pledged remaining receipts minus borrowing base, divided by pledged, is the OC gap. On the worked book: $80 million pledged, 10% ineligible, 85% advance rate, $61.2 million base. Capital ratio = 23.50%. That 23.5% is first-loss paper. It is not yet cash.

2. Total Equity After Reserves

Add the cash the agreement actually traps. Here reserves are $5.2 million (6.5% of pledged). Total equity is $24 million, 30% of the book. Effective advance after eligibility and reserves is 70% — fifteen points below the 85% print. That 70% is the leverage you may use when you size originations against tangible net worth.

3. Blended Coupon, WACC, and Cash Equity per Deal

Blended cost of funds on this facility is 10.00%: $44 million senior at 8.50% and $11 million mezzanine at 16.00%. WACC on $55 million of debt plus $24 million of equity at a 25% hurdle is 14.56%. Per origination, cash equity is not the full 30% of payback. It is advance + broker + reserve cash − warehouse draw. On the $40,000 / 1.28 file that is $8,160.

Coupon, WACC, and equity ratio converge on the worked 10.00% / 14.56% / 30% print. Price new originations off the current mix, not off last year’s senior headline.

How to Implement MCA Pricing Against Capital

Step 1: Certificate Capital on the Book

Lock an as-of tape. Strip ineligibles, apply the advance rate, and write three numbers on the same page: contractual AR, effective AR versus pledged, and AR after reserves. The worked certificate is 85% / 76.50% / 70.00%. Capital to fund the $80 million is $18.8 million; cash reserves add $5.2 million; total equity is $24 million. If TNW is below that, originations pause — the line can still look open.

Step 2: Blend the Warehouse Coupon

Weight each drawn tranche. Unused commitment does not enter the blend until you draw it, but unused fees do enter the P&L — add them to rd if the line is persistently undrawn. Here the line is in-formula and the blend is a clean 10.00%. That is the rate that accrues on the $39,168 this $40,000 deal can draw (payback × 76.50% effective AR).

Step 3: Compute WACC

Put a target ROE on originator equity. Specialty-finance platforms commonly underwrite 20–30% on tangible equity because the residual is first-loss MCA. At 25% on $24 million and 10% on $55 million, WACC is 14.56%. If your board will not accept 25%, the factor can come in; if losses run hotter than plan, F* has to go out. WACC is the conversation, not the senior spread.

Step 4: Load Deal Costs and Solve F*

A first-position merchant is offered $40,000. Expected collection is 90 calendar days. Broker is 10% ($4,000), expected loss 6% ($2,400), servicing 2.5% ($1,000). At a working 1.28 factor, payback is $51,200, the warehouse draws $39,168, and cash equity is $8,160. Warehouse interest for 90 days at 10% is $966. Target ROE on that equity is $503. The stack is $8,869. Required factor F* = 1 + 8,869 / 40,000 = 1.222.

Quote 1.28. The $11,200 factor fee covers the $8,869 hurdle and leaves a $2,331 buffer for slower ACH, extra NSFs, and stacking. Simple yield at 1.28 over 90 days is 0.28 × 365 / 90 = 113.56% — useful as a screen, not a substitute for F*. Where commercial financing disclosure applies, estimated APR still belongs on the offer next to the factor^[8].

The certificate above is the $40,000 deal sitting on the $80 million book. Read the cost stack left to right: broker and expected loss dominate dollars; warehouse interest and ROE$ are small at 90 days and grow if term extends. The right-hand capital panel is why you cannot originate another $80 million on $10 million of net worth.

Step 5: Quote Above the Hurdle and Stress the Box

Publish F* by expected days and EL band, then a quoted factor with a named buffer. Recompute when the mezz mix, unused fees, or reserve percentage moves. Pre-fund unboarded originations at a tighter advance rate — 75% versus 85% here — and hold the extra $0.10 per dollar as equity until first remittance. If the stress F* prints above the quote, either widen the factor or tighten the box. Do not “make it up on volume.”

Advanced Pricing and Capital Techniques

Term, Expected Loss, and Which Leg Moves F*

Lifetime EL is a dollar on the advance. Warehouse interest and ROE$ are time-scaled. Stretching collect from 90 to 150 days at unchanged 6% EL lifts F* from 1.222 to 1.246. Raising EL to 10% at 90 days lifts F* to 1.262. Combining 150 days, 10% EL, and a 12% warehouse coupon pushes F* to 1.294 — above the 1.28 quote. The buffer is not a mood. It is a finite number of loss and term points.

Warehouse Hold versus Forward Flow

Three structures fund an MCA book, and mature originators often run two at once^[1,4]. A warehouse keeps the paper and the spread; you supply 15–30% equity after haircuts. Forward flow sells 80, 85, or 90% of each funded advance to a committed buyer and you keep servicing plus a residual. Flow shrinks TNW drain and shrinks upside. Price flow on the buy rate and residual yield; price warehouse on WACC. Do not use one factor grid for both.

Pre-Funding Capital

Cash-in-before-disbursement is working capital, not performing collateral. A 10-point tighter pre-funding rate on $6 million pending is $600,000 of extra originator cash. If you pre-fund at the performing 85%, you have advanced first-loss to merchants who have not made a first ACH. That is a pricing error and a capital error.

Common Pricing and Capital Challenges

Senior Coupon as a Proxy for Cost

Credit memos that say “cost of funds 8.50%” will approve 1.22 factors that do not earn the 25% ROE. Put blended coupon and WACC on the same memo as F*.

Advance Rate as a Proxy for Leverage

An 85% print with 10% ineligible and 6.5% cash reserves is 70% leverage. Origination plans built on 85% over-commit TNW by roughly a fifth.

One Factor Across Every Term

The factor-rate article showed that a frozen factor explodes yield when collection is fast. This article shows the inverse: a frozen factor under-earns when collection is slow because WH and ROE$ grow with days. Grid F* by expected ACH days.

Real-World Applications

Daily Quote Grid

Rebuild F* overnight from the current blend, reserve percentage, and EL by score band. Underwriters pick a row (expected days × EL), see F* and the quoted factor, and cannot go below F* without a named exception. That is how 1.18 “to win the deal” gets caught before funding.

TNW Capacity

If tangible net worth is $18 million and the book needs 30% equity, pledged capacity is $60 million — not the $65 million commitment. The funding desk’s live cap is TNW / equity%, not unused line. Pair this with ending availability; the tighter of unused base and unused equity is binding.

Hold versus Sell Decision

When WACC rises (mezz drawn, equity scarce), selling flow at 85% of the advance can be cheaper than holding at 14.56% WACC even if the residual looks rich. Run both all-in yields on the same expected days and EL. The factor the merchant sees does not have to change; your hold-vs-sell economics do.

Tools, Metrics and Resources

A complete MCA pricing desk needs seven numbers on every quote: advance, expected days, EL, blended coupon, cash equity, F*, and quoted factor. A complete capital desk needs seven on every certificate: pledged, ineligible, BB, capital ratio, reserves, total equity, and AR after reserves. The interactive table is the booking layer; the 12-month WACC path is the monitoring layer.

Pair this article with factor-to-yield conversion when you disclose estimated APR, with borrowing-base availability when you decide whether the line can fund the quote, and with three-statement modeling when you project residual equity, reserve cash, and warehouse interest through a vintage.

Conclusion: Price the Stack, Capitalize the Gap

MCA pricing is a factor. MCA capital is the equity the warehouse will not fund. Connect them. Blend the coupons. WACC in the ROE. Load expected loss and broker as dollars. Solve F*. Quote above it. Size originations off equity after reserves, not off the 85% print.

Industry practice is to keep warehouse advances inside 80–95% of eligible receipts, hold 15–30% originator equity after haircuts and reserves, target equity returns in the 20–30% band, pre-fund at a tighter rate, and refuse to print a factor below F* without a named exception. On the worked book that is a 10.00% warehouse, a 14.56% WACC, $24 million of equity, a 1.222 hurdle, and a 1.28 quote — until the vintage or the mix says otherwise.