This information has been assembled to help Canadian business owners understand what are merchant cash advances, how they work and which companies are offering them to Canadian companies.
Merchant cash advances (MCAs) are essentially the sale of a business’s future sales, in exchange for immediate cash. The lender approves a lump sum payment to a business in exchange for a pre-determined percentage of that company’s future credit card (and sometimes debit card) sales. The percentage taken continues until the full payback of monies is fulfilled. This is becoming a popular financing alternative especially for small or mid-sized businesses that cannot or will not get a bank loan. The borrower gets immediate cash flow by selling a portion of his future receivables at a discounted price. His obligation is recouped, often by a third party, as his business earns.
Merchant cash advances usually require no credit check or collateral, and offer flexible terms. They are marketed as being convenient and fast, with many companies offering an online application process. Amounts of advances are usually based on projected credit card sales, so records of business performance are necessary.Basics of Merchant Cash Advance
This industry is becoming established, but since it is relatively new to Canada, it remains heavily influenced by providers who are U.S. based, mainly in regards to business model and pricing. Legislation varies with each area. There is still some mystery around the Canadian rules and regulations governing the industry.
Where this this advance may once have been most appealing to a small business that couldn’t get other financing, it is gaining popularity as a growth strategy. Cash up front allows a business to increase inventory (usually at a better price) when needed and this can generate a new cycle of growth.
Merchant cash advances are unlike bank loans or lines of credit and do not have the same terms those traditional types of financing have. They are not long term loans and do not have fixed payments or fixed interest rates. This financing may be seen as a ‘short term sale’ or the ‘discounting of future credit card sales.’
The funding is unsecured, meaning that the monies lent are not attached to any collateral that the lender could retrieve should there be a default on repayment. This represents a situation where the lender is taking a large risk, basically trusting the borrower’s promise to repay his lump sum. This risk, in turn, is offset by higher rates of lending, and may include borrowing premiums and associated fees. Unsecured financing often relies on credit history in its approval process, but the MCAs do not as they are interested in a cut of a business’s future sales. It’s through these future sales that the lender takes their cut, to the point of repayment. The interest rate, terms, fees, premiums and other related costs may or may not be factored together when calculating APR (annual percentage rate) as APR calculations vary.
Funding, cost, eligibility and requirements all vary depending on provider. Small business financers in Canada vary by size, geography, and financial capability. As with any other funding, experts recommend that those seeking funding deal with a firm that is in the same geographic area, is experienced with the business niche, is suited to the type and size of business, and who has a solid reputation and track record.
Is this a loan?
No, an advance is NOT a loan. With a loan, interest is placed on the money given by the lender based on both a fixed amount and time. The longer it takes to pay back, the more expensive the loan becomes. With an advance, a fixed percentage rate of sales is established up front. We are purchasing your future sales at a discounted rate. Also unlike a loan, we do not require a good personal credit score or collateral. The advance is issued based on your company’s revenue.
How do I qualify?
We do not fund startups. If you have been in business for over 6 months and have a monthly revenue of over $5,000, you qualify for an advance! Whether your revenue comes from credit cards (MCA) or invoices and bank deposits (ACH), our lending specialists will work with you to get your advance.
Can I get an advance if I already have a business loan?
Yes. Advances are evaluated on a case-by-case basis, and a loan does not necessarily exclude you from eligibility. If you meet our eligibility requirements, reach out to us by chat, email, or phone to speak with one of our specialists about your advance options.
What’s the difference between MCA and ACH advances?
A merchant cash advance (MCA) deducts repayment at point of sale from credit card purchases. Repayment is automatic with sales and based on a percentage. An automated clearing house advance (ACH) is designed for businesses whose revenue does not come primarily from credit cards. Instead, repayment is collected daily in small increments. We are one of the few companies that will sometimes accept weekly or bi-weekly payments.
How much can I get?
For an MCA, you can receive up to 200% of your monthly sales, in the range of 5,00-15,000. While initial advance amounts may be on the lower end of the spectrum, the more we do business with you, the higher amounts we will advance.
How can I use the cash?
Unlike a bank or a venture capitalist, we will not monitor or restrict your use of your advance. Nobody knows your business better than you do! Whether you need the capital for marketing, equipment, inventory, existing debt, an emergency, or a time-constrained opportunity, you can use our advance as you see fit.
How long does the process take?
After submitting our five minute, one page application, you will receive a no-obligation offer from one of our underwriters in under 24 hours. Should you chose to accept our offer, your funds will be available in as little as 2-48 hours.
How do I access the funds?
We will deposit the funds directly into your account using the account information provided by a voided check.
What documents will I need to submit?
You simply need to fill out our one page application with your three most recent months of bank statements. We will then present you with an obligation-free business funding offer. Before depositing the funds in your account we’ll need a copy of your lease, driver’s license, and a voided check.
Who can I direct any further questions to?
We pride ourselves on our extensive accessibility. We’re available via online chat or by phone at (844) 297-2274.
What is the cost of a cash advance?
Pricing is determined on a case-by-case basis. Several factors, including repayment time frame, underwriting review of business cash flow may affect pricing.
What are the typical payment ranges?
Each cash advance package is specifically tailored to fit your business, including rates. One of our lending specialists will determine the rates you qualify for with a free, no obligation phone consultation. Simply call now to get your rates.
How do you determine the payback of the cash advance?
Our in-house underwriters will review the bank statements and application you provided in order to formulate an advance that best fits your business. From there we consult with you, offering multiple options.
Will I have to pay an early termination fee if I currently have a contract with another processor?
Most processors will allow merchants to work with cash advance companies. In the event that yours doesn’t, you may have to switch. Generally there is no early termination fee. If there is, you will be responsible for payment.
What if I have bad credit?
Our product is designed to allow businesses with bad credit to still get financing. Our primary consideration in formulating our advances is your company revenue. If you have a profitable business without ideal credit, you may still qualify for an advance.
What if I encounter obstacles with repayment?
If you are struggling with repayment, let us know. One of our financial advisors will work with you to make sure you can meet the terms of the advance. We strive to be as flexible as we can to grow your business.
Growth in merchant cash advance usage
Although the general concept that merchant cash advance funding is based on has been around in some form for centuries, it has galvanized into an industry since the late 1990s. When the credit environment tightened in the 1990’s, many smaller businesses found it a challenge to raise capital – so the environment was ripe for alternative forms of financing to boom.
The merchant cash advance industry is starting to explode and observers expect a huge amount of growth. Estimates say that providers have only penetrated a very small portion of the potential market.
Advantages of a Merchant Advance
The merchant cash advance industry has a big marketing machine behind it that purports great advantages over other, traditional types of financing.
Fast and easy Application?
One of the most highly touted advantages is that it said to be a fast and easy application process. In fact, most companies offer online applications. Approval rates tend to be high and the turn-around time on applications can be as short as a few business days. Bank loans, in comparison, require a lot of lead time and have a complex application process, heavy documentation and strict lending restrictions.
The amount of personal and business information that is examined when applying for an MCA is much less than a bank loan application demands. Credit ratings are often not checked since providers are not assessing your credit-worthiness like a bank would when assessing a loan application.
Retail merchants have long been considered risky by the banking industry. Failure rates are very high for small retail businesses, service companies and restaurants.
Immediate cash flow
Another advantage that a merchant cash advance can provide is that of immediate cash flow or working capital. When used properly, this can allow a business to improve sales and profit. A business gains an advantage when they get immediate cash that can be used to purchase inventory at a cheaper price. Suppliers sometimes offer a small discount (around 2%) when they get paid immediately (or usually within a 10 day period.) In this case, it can work out that the discounted supplies and subsequent profit made from them offset the cost of borrowing money. When this strategy works in a business’s favour, they have gained financial power. The bottom line is that it’s up to the business seeking financing to get all the necessary information, read the fine print and to develop their strategy from there.
Requirements and application process
Besides online applications, CMCH use phone interviews; ultimately, this financing need not be done face to face. The application process begins with basic information to see if the business ‘pre-qualifies’ for funding. If so, there will be an offer for how much funding the company qualifies for and the repayment terms which include an estimated time frame and a daily percentage rate (daily, not annually) that the lenders will take out of future credit card sales. The time-frame has to allow for variations in sales volume.
Applications are one to two pages long. Relevant business and personal information will be requested. Contact information for the business’s bank, vendors or landlord may be required. A credit review will likely be asked for. Recent (from 2-6 months’ worth) of bank statements will be requested in order to assess average daily sales.
Although many companies claim that a credit check is not an issue when it comes to getting a MCA, it’s common for many to request business and personal credit information (which may include credit rating or credit score.) Issues likely to result in a declined application include tax liens, court cases or outstanding judgements, current or prior bankruptcy filings, foreclosures, lapse in mortgage payments and more.
Applicants for a MCA will submit merchant account statements and business bank statements so that we have a good idea of sales history, seasonal ups and downs, and cash flow activity. All of these affect repayment.
Additional supporting documentation
Verification of business location is commonly requested: this may be in the form of a property lease or mortgage. This is done to ensure that the business is legal, stable and that all information is accurate. Further documentation such as a voided cheque from the company bank account, a business license, and personal documentation such as photo ID may be requested. There have been reported cases where tax returns and financial statements were asked for.
Establishing repayment method
Before funding is put into place, the lender and borrower must establish a method of transmitting credit card revenues. This is where the merchant account processor comes into play. There can be restrictions around the merchant account processor used.
Interview and reference check
The MCA provider will seek an interview when an application is under consideration or about to be approved; often, this is done by phone. The provider is likely to vet references such as the business bank, business property landlord and perhaps vendors, in order to verify information. Sometimes the references need to be put into writing, other times a verbal reference is acceptable.