Merchant Cash Advance

What is a Merchant Cash Advance MCA:

In the Canadian business landscape, the Merchant Cash Advance (MCA) has emerged as a compelling financing tool for businesses in need of quick capital. But what exactly is it?

An MCA is not your typical business loan. Instead, it offers a business a lump sum of money up-front, which the business then repays through a percentage of its future credit and debit card sales. Here's a breakdown:

Initial Advance:

A merchant cash advance company provides businesses with a sum based on their average monthly credit and debit card transactions. In essence, these companies purchase a portion of the business's upcoming sales.

Repayment Methodology:

Instead of a fixed repayment schedule like regular loan, the MCA's repayments are seamlessly integrated into the business's operations. A pre-determined percentage of the debit and credit card sales is automatically deducted and used to repay the advance.

Advantages Over Traditional Methods:

MCAs stand out from unlike traditional bank loans. They prioritize a business's sales volume rather than solely its business credit profile or credit scores. This makes them especially attractive for business owners with bad credit or those seeking flexibility.

Application Process:

To apply for a merchant cash advance, businesses generally need to provide details of their merchant account, average monthly sales, and business bank account. The factor rate, which determines the total amount to be repaid, is then set based on these details.

While a merchant cash advance loan might sound similar to business loans, its structure and repayment methodology are distinct. It's anchored to a business's sales, ensuring that the capital repaid aligns with a company's cash flow, making it a viable alternative for Canadian businesses seeking immediate financial support.

Importance of MCA for Canadian Businesses:

No collateral required

Unlike a traditional small business loan, an MCA does not require collateral, making it an attractive option for businesses that may not have valuable assets to offer as security.

Adaptable to cash flow

One of the key advantages of a merchant cash advance is its flexible repayment structure. As repayments are based on a percentage of future credit sales, businesses with fluctuating revenue can benefit from lower repayments during slower periods. This adaptability can be especially beneficial for seasonal businesses that experience significant variations in their flow of cash throughout the year.

Fast access to funds

Merchant advances offer a quick and efficient way for Canadian businesses to access the capital they need. Once approved, funds can be deposited into a small business merchant account within a few days, or even hours in some cases. This speed can be crucial for businesses facing sudden expenses or opportunities that require immediate action.

Increased cash flow

A merchant cash advance can provide businesses with the necessary capital to invest in growth opportunities, cover unexpected expenses, or simply improve their flow of cash. This increased financial stability can be invaluable for Canadian businesses looking to thrive in a competitive market.

Suitable for businesses with bad credit

For businesses with a less-than-stellar credit history, getting a merchant cash advance can be a viable alternative to traditional financing options. Since MCA providers focus primarily on credit card transactions and future sales, businesses with poor credit may still qualify for funding.

A merchant cash advance is a lifeline for Canadian businesses in need of fast access to funds. By leveraging credit card sales that will take place in the future, an MCA offers a flexible financing solution that adapts to a business's unique cash flow needs.

While it may not be the right choice for every small business, understanding how a merchant cash advance works and its potential benefits can help entrepreneurs make informed decisions about their options.

How Does A Merchant Cash Advance Work?

Navigating the world of business financing can be challenging, but understanding the how the Merchant Cash Advance work can provide clarity and options for many small business owners. Here's a more detailed look:

The Basics:

At its core, an MCA offers a lifeline of access to a small business loan, especially for companies with low credit scores, allowing them to access working capital swiftly. It functions differently from a traditional loan. Instead of borrowing a fixed amount and having to pay back with interest, a business effectively 'sells' a part of its future credit card sales to a merchant cash advance company.

Getting Started:

To get this business cash advance, a business owner agrees on a factor rate, which determines the total repayment amount. This includes the advanced sum plus a fixed fee. This rate, often confused with annual percentage rates in regular loans, is unique to MCAs.

Repayment Mechanics:

Merchant cash advance repayments don't follow a conventional monthly plan. Instead, they are dynamic. A set percentage of your daily (or sometimes weekly) credit card and debit card payments are deducted until the advance is paid in full. It syncs with the business's flow of cash, making it suitable for enterprises with variable revenues or high volumes of debit sales.

Why Choose an MCA?:

Several reasons make an MCA appealing. Firstly, the unsecured nature of this cash advance means business owners aren't required to put up collateral. Secondly, the approval process tends to be faster than traditional banks and traditional lenders, making it ideal for short term expenses or quick cash flow needs. Moreover, the repayment plan adjusts according to sales, offering flexibility not seen in models like invoice factoring.

Who Benefits the Most?:

Businesses that lean heavily on card transactions, those experiencing rapid merchant growth, or those overlooked by traditional banks due to stringent criteria often find MCAs a viable solution.

Real-World Scenarios:

Consider a restaurant suddenly facing unplanned renovations to comply with new regulations—an MCA can offer the extra funds needed on short notice, helping them upgrade quickly and potentially boost sales, which in turn accelerates repayment. Similarly, a hotel looking to capitalize on an upcoming holiday season might use a merchant cash advance to invest in an online ad campaign, aiming to fill more rooms and repay the advance faster thanks to the increased bookings. Even a spa interested in expanding its services by purchasing new equipment can benefit from the flexibility of an MCA, acquiring what they need now and repaying the advance as their future sales grow.

These examples highlight how merchant cash advances can support businesses with fluctuating revenues or urgent, opportunity-driven expenses, making them a practical choice for many owners navigating unpredictable financial waters.

Understanding how a merchant cash advance works can be the key to unlocking growth and managing unforeseen expenses, providing an avenue different from the rigidity of regular loans.
Unlike traditional business loans, an MCA is unsecured—meaning you don’t have to put up collateral like equipment, inventory, or property. Instead, the amount you can access is based on the volume of your credit and debit card sales. This makes an MCA a flexible option for businesses whose income fluctuates, as repayments automatically adjust to your daily or weekly card transaction volumes. When your business is thriving, you pay off the advance more quickly; during slower periods, repayments naturally slow down.
Another advantage is that there are no late fees or penalties for early repayment. Since payments are deducted directly from your card sales, you never have to worry about missing a payment or being hit with extra charges if you pay it off ahead of schedule. This adaptive structure offers peace of mind, especially for small businesses or startups experiencing unpredictable cash flow.
Ultimately, a merchant cash advance stands apart from standard loans by aligning with your business’s performance and providing a streamlined, collateral-free way to access working capital.

Eligibility Criteria for Businesses in Canada

To be eligible for a merchant cash advance in Canada, businesses must meet the following criteria:

• Minimum Monthly Sales: Most merchant cash advance companies set a minimum threshold for monthly credit card sales, which can vary depending on the provider.

• Established Small Business: Merchant cash advance providers typically require businesses to have been operating for a certain period of time, often ranging from 6 months to a year.

• Consistent Revenue: MCA providers will assess bank statements and credit card processing history to ensure the business has a steady flow of revenue.

• Accepts Credit Card Payments: The small business must accept credit card payments, as the MCA is based on future credit sales.

• Canadian-based Business: The business must be registered and operating within Canada.

How MCA Providers Evaluate Applicants

Merchant cash advance providers evaluate applicants based on several factors to determine the amount and terms of the advance. Here are some of the key factors considered:

Credit Card Sales History

The primary factor in determining eligibility for an MCA is the business's credit card sales history. Providers will analyze the volume and consistency of these sales to estimate future revenues and calculate the advance amount.

Business Owner's Credit Score

Although an MCA is an unsecured loan, some providers may still check the business owner's credit score. While a lower score may not necessarily disqualify an applicant, a higher score can result in more favorable terms and rates. In some cases, lenders may place more value on your business’s credit card transactions than on your personal credit. This means that, for certain applicants, a full credit check may not be required. Instead, providers often conduct a “soft” review of your credit rating to look for major issues that could affect your ability to repay. However, if there are significant concerns regarding creditworthiness, a lender might request a more comprehensive credit check before making a decision.

Bank Statements

MCA sources will review business bank account statements to gain insight into the business's financial health and stability. Consistent flow of cash and a positive balance can increase the likelihood of approval.

While lenders typically focus on your card payment volume and history first, you should still expect to provide some form of financial documentation—usually in the form of recent bank statements. In many cases, lenders may also request records related to your cash flow, balance sheet, or even tax returns to get a fuller picture of your business's financial landscape.

Ultimately, each lender has their own requirements, but the goal is always to assess risk as accurately as possible. If your business is new or lacks extensive financial records, be prepared to share personal tax returns or alternative documents to help support your application.

Industry and Business Model

The merchant cash advance company will consider the type of industry and business model when evaluating an applicant. Some industries may be considered higher risk, potentially affecting the terms of the advance.

Outstanding Debts and Liabilities

Providers may review any existing debts or financial obligations, as these could impact the business's ability to repay the advance.

Advantages of Merchant Cash Advance

There are numerous advantages that come when you apply for a merchant advance compared to a traditional bank loan. Some of these advantages include:

Potential Disadvantages of Merchant Cash Advance

A merchant account advance is an excellent choice for a business owner, however they do come with some disadvantages as well. The biggest drawbacks to get a merchant cash loan include:

What Happens If You Default on a Merchant Cash Advance?

Defaulting on a merchant cash advance can lead to serious financial consequences, much like defaulting on a traditional business loan. If your business is unable to meet the repayment terms, the merchant cash advance provider may pursue a variety of actions to recover the outstanding amount.

• Collection Efforts and Legal Action:
  MCA providers often begin with collection efforts, which could involve reaching out directly to arrange repayment or working with collection agencies. If repayment cannot be arranged, the provider might take legal action, such as filing a civil lawsuit to recover their funds. This can result in court judgments against your business.
• Impact on Business Assets and Credit:
  In the event that you have offered a personal guarantee or pledged specific assets, the provider may have the right to seize those assets to cover the unpaid balance. This could affect business property, equipment, or even your personal property, depending on the terms of your agreement. Additionally, defaulting may damage your business credit score, making it more difficult to secure financing in the future.
• Risk of Ongoing Financial Strain:
  Beyond legal and financial repercussions, defaulting on a merchant cash advance can disrupt daily operations. Cash flow may become further strained due to collections or garnishments, and the resulting financial uncertainty can impact your ability to manage business expenses or plan for future growth.

Because of these risks, it's important for business owners to carefully review their merchant cash advance agreement and only proceed if they are confident in their ability to meet repayment terms. Reaching out to your provider early and discussing any anticipated payment issues can sometimes prevent a difficult situation from escalating.

Merchant Cash Advance Alternatives in Canada

Canadian small businesses have several financing alternatives to consider when looking for a funding solution that best suits their needs. A traditional bank business loan, lines of credit, a government-backed business loan and grants, and online lenders each offer unique advantages and drawbacks.

By evaluating these options and understanding their requirements, business owners can make informed decisions to secure the right financing solution that will support their business's growth and success.

Government-Backed Loans and Grants

A Canadian business can also explore government-backed loans and grants as an alternative to merchant cash advances. Various federal and provincial programs offer financial assistance specifically tailored to a smaller business, with favorable terms and lower rates.

These programs may also provide grants, which do not require pay back, making them an attractive option for a business that meets the eligibility criteria. However, the application for government-backed loans and grants can be more complex and time-consuming than other financing options.

Online Lenders

Online lenders have emerged as a popular alternative to regular loans and merchant cash advances for a Canadian business. These lenders often have a more streamlined application process, allowing a business to apply for financing and receive approval within a matter of days. Online lenders may offer a variety of financing options, including term loans, lines of credit, and invoice financing. While interest rates can be higher than regular loans, they may still be more competitive than the factor rates associated with merchant cash advances.

Traditional Bank Loans

For a small business seeking financing alternatives to a merchant cash advance, traditional bank loans can be a viable option. These loans typically offer a lower interest factor rate compared to merchant cash advance rates and often provide a lump sum or a revolving line of credit.

The pay back terms for a traditional business loan are usually more predictable, with fixed repayments over a set period. However, securing a traditional business loan may require a personal guarantee, more extensive financial records, and a longer application process compared to a cash advance.

Lines of Credit

Lines of credit offer a business access to a predetermined amount of funds, which can be drawn upon as needed. Similar to a credit card, a business only pay back interest on the amount they use, and the credit line can be replenished once the borrowed amount is paid back. Lines of credit can be a more flexible option than a lump sum loan, allowing a business to manage cash flow more efficiently. Keep in mind that lines of credit may still require a personal guarantee and good credit history.

Frequently Asked Questions About Merchant Cash Advance

How quickly can I receive funds from an MCA in Canada?

The speed at which your merchant account will receive funds from a merchant cash advance provider in Canada can vary, but it is generally much faster than a traditional business loan. Once your application is approved, you may receive the advance amount within as little as one business day.

The streamlined approval process and quick access to funds make merchant cash advances an attractive option for a smaller business in need of immediate financing.

Are there any restrictions on how I can use the funds?

Merchant cash advances are typically quite flexible when it comes to how you can use the funds. A business can use the cash advance for a variety of purposes, such as purchasing inventory, covering payroll, investing in equipment, or addressing unexpected expenses. However, it is essential to discuss any potential restrictions with your merchant cash advance provider when applying.

What are the average fees and interest rates for MCA in Canada?

Fees and interest rates for merchant cash advances in Canada can vary depending on the provider and the specific terms of the loan agreement. Instead of a traditional interest rate, MCAs use a factor rate, which is multiplied by the advance amount to determine the total pay back amount. Factor rates typically range from 1.1 to 1.5, which can translate to higher costs compared to regular loans. It's essential to carefully review any hidden fees and factor rate associated with your MCA before agreeing to the terms to ensure you are fully aware of the payback amount.

How does the repayment process work?

The process to repay the advance is based on a future percentage of your business's daily credit card transactions. Your credit card processor will automatically deduct the agreed-upon percentage from your credit card receipts and forward it to the merchant cash advance provider until the advance is fully repaid. This means that your repayments will fluctuate depending on your day-to-day sales, providing flexibility for a business with inconsistent revenue streams.

Can I apply for an MCA if I have bad credit?

Yes, you can still use a merchant cash advance if you have poor credit. Since the advance is based on your future credit sales rather than your credit history, MCA sources often have more lenient credit requirements compared to traditional loans. However, having bad credit may impact the terms of your MCA, such as the factor rate and the maximum advance amount. It's essential to discuss your specific situation with the merchant cash advance provider when applying.

Who is eligible to apply for a merchant cash advance?

A merchant cash advance (MCA) is a unique financial product that caters to businesses needing quick access to capital. Rather than acting like a traditional loan, it advances funds based on a company's predicted credit card sales. Here's a detailed breakdown of the eligibility criteria:

Business Nature and Sales Volume:

Businesses that have a significant volume of credit and debit sales are primary candidates. This is because the core idea behind an MCA is the repayment through a percentage of your daily credit card and debit payments.

Duration of Business Operations:

Merchant cash advance companies typically prefer businesses that have been operational for a certain period, ensuring they have a track record of consistent sales.

Credit Score:

Unlike regular lenders and banks, many MCA providers are more lenient with low scores. They prioritize the business's performance and future credit card sales over the business owner's credit history.

Monthly Card Sales Volume:

A business should have a consistent volume of card transactions, ensuring they can handle the merchant cash advance repayments effectively.

Use of Recognized Payment Processors:

Having a recognized payment processor is often a requirement, as the MCA providers will access your card transactions directly from them for repayment.

Absence of Other Debt Obligations:

If a business owner already has several business loans or cash advances, some MCA companies might be hesitant to provide another. However, this varies among providers.

Predictable Business Growth and Sales:

Merchants showing signs of steady or increasing merchant growth are often viewed more favorably, as this indicates a better capacity to repay.

Understanding of MCA Terms:

It's vital for the business owner to comprehend how a merchant cash advance works, including factor rates, fixed fees, and the total repayment expected.

Estimating Your MCA Repayments

Before moving forward, it’s helpful to understand what your repayments might look like. Many providers offer simple calculators to estimate the total you’ll repay, the approximate repayment term, and your average daily payment—based on your requested advance, the agreed factor rate, and your business’s average monthly card sales.

For example, you’ll typically be asked for:

• The amount you wish to borrow
• The factor rate provided by your lender
• Your average monthly card sales
• The percentage of daily card sales you’ll use for repayment

With these details, you can estimate:

• Total repayment amount: The full sum you’ll pay back, including fees.
• Average daily repayment: The typical daily deduction from your card sales.
• Estimated repayment period: How long it will likely take to repay the advance in full, based on your sales volume.

These calculations are meant for guidance only—the actual terms may differ depending on your agreement with the lender. Always clarify the details before committing, so you know exactly what to expect throughout the process.