In a prior article, Main Street MCA Distress: Emerging Opportunity for Secured Finance and Credit Rehabilitation, I presented a framework for credit rehabilitation – specifically, how MCA distressed businesses can be stabilized and positioned to re-enter conventional financing channels, and how this process creates significant opportunities for asset-based lenders and the broader secured finance market. Within that discussion, I alluded to the growing role of third-party solutions in bridging the gap between operational opacity and the level of discipline and transparency required for effective underwriting.
This article examines what is likely the most immediate and impactful of these solutions: the role of third-party AR and AP management in creating the visibility, discipline and observable performance required to support underwriting and facilitate a transition back to conventional credit.
The Visibility Gap
The glaring inefficiency often observed in the distressed and post-distress finance ecosystem is that underwriting is often bottlenecked not by the collateral itself, but by the opacity of the business’ performance – a set of circumstances that typically precludes a stabilized business from graduating up the credit hierarchy toward a more cost effective and responsible capital structure.
Distressed businesses in the lower middle market, particularly those emerging from MCA related distress, are characterized by fragmented capital structures, inconsistent or nonexistent reporting, and unclear control over cash flow. Multiple creditors may be drawing from the same pool of receivables, payment patterns are frequently irregular and financial statements, if available, do not reflect the current operating reality of the business.
Even when a company begins to stabilize, there is often no clean way to demonstrate it. From a lender’s perspective, there is no reliable basis for underwriting forward performance. As a result, many businesses, particularly those burdened by Merchant Cash Advance settlement obligations, cannot be underwritten in their current, opaque form – precluding opportunities for secondary lenders in the MCA refinance space.
This dynamic has effectively closed off an otherwise large and viable segment of the market to asset-based and junior cash flow lenders. The constraint is straightforward yet often overlooked: an absence of the structure and transparency required to support thorough diligence and underwriting.
“In these situations, the issue isn’t necessarily business performance or even the leverage—it’s more basic. There’s no reliable way to see what’s actually happening. Without accurate and verifiable information, there’s no basis to underwrite future performance, even if the business is stabilizing.” -- Gino Clark, SLR Business Credit
Underwriting Transparency
A solution to this impasse is the role that can be played by third party A/R and A/P management platforms – not as an administrative function, but as underwriting infrastructure, creating the visibility, discipline, and performance record required for lenders to engage.
Traditional approaches to resolving MCA distress do little to create this bridge. Settlement programs may reduce payment burdens, but they do not impose reporting discipline or create a track record that can be relied upon. Additionally, informal workouts are inconsistent and difficult to document.
In each case, the outcome is similar. The business may survive, but it remains outside the reach of conventional credit.
“There’s no shortage of MCA ‘relief’ firms that will, to some extent, renegotiate payment terms. But rarely in that space are those new payment terms pegged to a first position coverage ratio, which must be the case in order to consider the business stabilized. Even then, the business generally hits a brick wall, unable to refinance out those settlements, and remains trapped in them, unless there is a plan to position them for conventional underwriting. Third party AP and AR management is often part of that plan.” -- Michael Petrecca, Rise Alliance
What is required is a mechanism that converts stabilization into something a lender can actually underwrite. This is where third-party AR and AP control platforms change the equation.
In the context of emerging from distress, these platforms do more than process payments and collect receivables. They establish control over cash flow. Receivables are centralized. Disbursements are managed according to a defined structure, and in observance of priority. Payment hierarchies can be enforced, and most importantly, all activity is captured in a consistent, auditable format.
This creates something that did not previously exist: an auditable record of performance and compliance.
Furthermore, as the business stabilizes, and as its cash and collateral positions may improve, that record becomes the foundation for underwriting. Payment history is observable, coverage can be measured, and reporting becomes transparent. The business transitions from a state of opacity to one of visibility.
Diligence is no longer a messy, retroactive exercise. It is created on an ongoing basis through the discipline imposed by centralizing AR and AP outside of the business itself.
Radd Payment Solutions is one such platform addressing this gap, providing third-party revenue management and payment control infrastructure that creates the visibility and discipline required for underwriting, as Gabrielle Gould, COO, explains:
“As a revenue management company, we see distressed clients burdened by MCA or MCA settlements on our platform graduate to third-party financing after 6-12 months by proving performance and a quality of earnings that are attractive to lenders, when they previously faced no options, especially in light of SBA regulations disqualifying MCA borrowers. Third-party verified revenue, combined with verified performance metrics and settlement obligation performance, is the key to success when refinancing MCA obligations.”
Control at the Source: Reframing Cash Flow Risk
Assigning accounts receivable and accounts payable to a third-party administrator can materially enhance underwriting confidence for an asset-based lender by shifting control of cash flow away from the borrower. When receivables are assigned, collections are directed to the assignee at the source, removing the borrower’s ability to influence the timing, application, or use of incoming funds. This creates a form of upstream cash dominion, where control exists at the point of cash generation rather than relying solely on downstream monitoring.
In practice, this becomes most relevant in situations where an ABL is evaluating a credit that would otherwise be unfinanceable due to lack of visibility or control. This often includes businesses emerging from MCA distress, informal workouts, or other capital structures where multiple parties have historically accessed cash flow without coordination or clear priority. In these cases, the issue is not just collateral sufficiency, it is whether the lender can rely on the integrity of the cash cycle.
“Determining lien priority in any restructuring process is very important and yet can be unusually difficult at times. When companies require new financing to support new business, challenges are presented, and providing subordination has to come into play, if it can be achieved. Being able to negotiate this with multiple lenders is tough.” -- Sari Placona, Partner, McManimon, Scotland & Baumann, LLC
It is also critical in transitional credits, where a borrower is moving from high-cost, unstructured obligations into a conventional lending environment but has not yet established a track record of disciplined financial behavior. The assignment structure allows the lender to observe performance in real time, rather than relying on reconstructed financials or borrower data.
More specifically, this framework becomes valuable when an ABL is considering a takeout of a distressed or MCA settlement situation where prior cash management has been inconsistent, a credit with adequate collateral support but insufficient confidence in borrower-controlled collections, or a borrower with limited or unreliable historical reporting, where performance must be demonstrated, and can’t be assumed.
In these contexts, upstream control over receivables and structured disbursement of payables effectively substitutes for the discipline the borrower historically lacks. It allows the lender to underwrite not just the asset base, but the behavior of the business itself. The result is that credits which would otherwise be declined due to opacity can be evaluated on observed performance, creating a pathway for ABL participation where it would not otherwise be possible.
“This is effectively the same discipline you’d expect from a financial advisor in a turnaround – tight control over cash, clear operational visibility, and making sure every dollar out the door aligns with lender priorities. Where a full advisory mandate isn’t viable, assigning receivables and structuring payables gets you close to the same place. It creates a controlled framework where performance can be monitored and pressure-tested in real time.” -- Nick Welch, BDO
Implications for ABLs and Factors
For ABLs, third party AR/AP management gives the lender control and visibility over cash flow at the source, not just after the fact. It allows them to observe real performance rather than relying on borrower-reported financials, which is critical in distressed or transitional credits. The result is that deals that would otherwise not be underwritable due to lack of control or visibility can be evaluated based on actual, observable behavior.
For factors who already control collections, the benefit is the quality of the receivable itself. Billing ensures invoices are generated in a controlled way, reducing disputes, improving documentation, and increasing confidence in factoring base eligibility. This allows factors to scale exposure in credits where borrower-generated reporting would otherwise limit how much they are willing to purchase.
At the same time, centralized billing improves the quality of the receivable itself. While a factor ultimately owns the receivable and looks to the account debtor for repayment, the reliability of that asset still depends on how it was created. When invoicing is generated through a consistent, transparent system rather than the borrower, the risk of disputes, misbilling, or inflated accounts is materially reduced.
The result is cleaner aging, more reliable eligibility, and greater confidence that the receivables being purchased reflect actual completed deliverables. For a factor that doesn’t change who they are underwriting, rather, it improves the quality of what they are buying, which in turn supports higher advance rates and increased borrowing base.
In both cases, the effect is the same: the receivable stops being a borrower-reported asset and becomes something generated, tracked, and verified within a controlled system. That shift, from representation to observation, removes opacity and improves underwriting confidence.
The Role of Payables Discipline
On the payables side, routing disbursements through a controlled process gives lenders visibility into how cash is actually being used. If payables are unmanaged, vendors get stretched, liabilities build outside the lender’s view, and operational stability starts to erode. That ultimately feeds back into the collateral—through disrupted revenue, disputes, or declining receivables quality.
A controlled disbursement structure allows payments to follow a defined order and keep liabilities visible. For an ABL, this supports confidence that the business isn’t creating unseen liability risk that will surface later. It reinforces the integrity of the borrowing base by stabilizing the operation behind it.
Structurally, this approach allows lenders to underwrite within a forward-looking control framework, rather than relying on historical borrower behavior. It can provide comfort in credits with previously inconsistent reporting, weak financial controls, or prior distress by embedding a real time cash flow control and verification function directly into the flow of funds. It also reduces the need for reactive oversight, as many of the functions traditionally validated through field exams are instead governed in real time.
“This presents a compelling opportunity to establish greater transparency across the entire cash conversion cycle while maintaining disciplined oversight of vendor activity. In the construction sector in particular, it is critical to closely monitor lienable accounts payable to mitigate risk and ensure compliance. Additionally, in situations where clients carry tax liens, diligent tracking of payment activity and payables becomes essential to preserve collateral integrity and maintain financial control.” -- Alexandra Scoggin, nFusion Capital
From Stabilization to Underwriteable Credit
Viewed through this lens, an MCA payment restructuring or settlement period can become more than a phase of stabilization. Instead, it becomes a kind of proving ground. The business is not only working through its obligations but also demonstrating performance and compliance.
By the time a lender evaluates the opportunity, the question is no longer whether the business can function, but simply whether or not collateral and coverage can position the opportunity within the credit box.
“For example, a client who owned a portfolio of restaurants and food-service businesses was burdened by multiple MCAs. Their coverage ratio across all MCAs was 0.5, indicating they were far short of their obligation. With assistance from a reputable restructuring consulting firm, they renegotiated payments to their MCA creditors to align with a 1.2 coverage ratio. They enrolled in our service and after 6 months of operations on our platform, the business had demonstrated performance, paid down a portion of its obligations, and refinanced with third-party financing that stretched its payments over 48 months and provided working capital.” -- Gould of Radd Payment Solutions
From a strategic perspective, this introduces a new pathway into the market. Rather than waiting for a fully “clean” situation, which may never materialize, lenders can engage at the point where performance has been previously demonstrated within a controlled environment – while at the same time requiring by covenant that borrowers remain within such a managed structure, pending other performance and reporting benchmarks.
Graduating Back to Conventional Finance
For the borrower, the implications are equally significant. Access to conventional financing is never restored through MCA payment re-negotiation alone. It is restored through the ability to demonstrate disciplined financial behavior over time. Third-party AR/AP transparency provides the framework through which that demonstration can occur.
Without it, many businesses remain in a holding pattern, no longer in immediate distress, but still unable to re-enter the conventional credit market.
The broader conversation around lower middle market and MCA-driven distress has focused on the risks these products introduce and the challenges they create for both borrowers and lenders. Those challenges are real. But they are only part of the story.
The more important question is how to convert a distressed, unstructured situation into one that can be evaluated and financed.
That conversion requires structure, discipline and visibility. Outsourced AR and AP management provides all three. It offers a mechanism that bridges the gap between stabilization and financeability. It is what transforms a business from opaque to underwritable. And for a segment of the market that has remained largely out of reach, it is what makes re-engagement possible.