Canada Small Business Financing Loans vs. Merchant Cash Advances

There are many small business loan options available to businesses in Canada, including government-funded programs like Canada Small Business Financing Loans, bank loans, and funding from alternative lenders such as merchant cash advances.

Every type of funding has different application requirements, qualification criteria, and ideal uses. If you’re busy operating and growing your business, it can be difficult to determine what type of funding best suits your needs, and even harder to compile the necessary documents for your funding application.

In this post, we’ll compare Canada Small Business Financing Loans (CSBFLs) to merchant cash advances (MCAs) to help you understand the differences between these two popular but very different funding options.

At A Glance: Canada Small Business Financing Loans vs. Merchant Cash Advances


Canada Small Business Financing Loans Merchant Cash Advances
Loan Amount Up to $1M Up to $500,000
Loan Type Guaranteed term loan Non-loan form of financing known
as an asset purchase
Term Lengths Up to 15 years Typically less than 3 years
Fees 2% registration fee on all loans
Variable interest rates up to prime lending rate + 3%
Fixed interest rates up to lender’s single family residential mortgage rate + 3%
Additional fees applied by lender
Based on a factor rate, typically around 1.5
Application Process Can take weeks for banks to process,
with significant financial documentation requirements
Streamlined online application
with funds deposited in as little as one business day
Qualifications Strong personal credit Flexible requirements with more focus on
business potential than financial history
Repayment Minimum monthly payment
that covers interest and principal
Percentage of daily or weekly debit and credit card sales
is deducted until the advance is repaid
Ideal Uses Purchasing land or real estate,
equipment, or improving leased property
Working capital to fund growth strategies
or cover unplanned expenses

Canada Small Business Financing Loan Program

What are Canada Small Business Financing Loans


Canada Small Business Financing Loans are provided by private lenders (including most commercial banks) and are guaranteed up to 85% by the federal government, similar to Small Business Administration (SBA) loans in the United States.

The partnering commercial lenders disburse the funds and are solely responsible for approving your application. If your application is approved, the financial institution will deposit your funding and register the loan with Innovation, Science, and Economic Development Canada.

Funding amounts, terms, and uses


Up to $1M in funding is available, but funds can only be used for specific purposes, including:

  • Purchasing or improving land or buildings used for commercial purposes, typically with 15 year terms
  • Purchasing or improving new or used equipment, typically with 10 year terms
  • Purchasing new or existing leasehold improvements, such as renovations to a leased property by a tenant, typically with 7 year terms

Eligibility

Canada Small Business Financing Loans are available to most established small businesses and start ups with gross annual revenues of $10M or less, including corporations, sole proprietors, partnerships, and cooperatives.

In addition to a strong financial and credit history, your lender will also require a detailed loan proposal that outlines how much money you are seeking, what it will be used for, and how you intend to pay it back.

Farming businesses are not eligible for CSBFL funding.

Collateral or personal guarantee may be required, potentially up to 25% of the loan amount.

Rates and fees

Rates and fees for CSBFL loans are determined by the financial institution you’re working with.

Multiple repayment options are available, including fixed and floating interest rates. Interest rates may be fixed or floating depending on the loan amount, as well as your creditworthiness and risk assessment:

  • Maximum fixed interest rate: The lender’s single family residential mortgage rate + 3%
  • Maximum floating interest rate: Prime lending rate + 3%

All CSBFL loans are also subject to a registration fee equaling 2% of the loan amount. The borrower must pay this fee to their lender, but it may be financed as part of the loan. Other fees, such as documentation preparation and application fees, may also apply and will depend on your lender.

Canada Small Business Financing Loans are ideal for:


  • New businesses looking for financial support to start or grow their business
  • Established businesses experiencing issues with cash flow as a result of a large investment
  • Businesses seeking larger loans to purchase or improve land or buildings, new or used equipment, or existing leasehold property
  • Businesses with strong financial histories

Merchant Cash Advances

What are merchant cash advances?


Merchant cash advances are technically not a loan—they are a non-loan form of financing known as an asset purchase.

Instead of depositing a lump sum that is repaid in set monthly instalments like Canada Small Business Financing Loans, MCAs provide working capital up front in exchange for a percentage of your business’s daily or weekly credit and debit card sales until the advance has been repaid.

Available from direct online lenders like Greenbox Capital®, MCAs have a streamlined online application and flexible underwriting requirements, and in some cases can be approved with funds deposited in as little as one business day.

Funding amounts, terms, and uses


Up to $500,000 in funding is available, typically with much shorter terms than CSBFLs (usually three years or less).

There are no restrictions on how funds are used, but merchant cash advances are typically best used to support growth initiatives that will increase revenue, such as:

  • Investing in marketing and advertising
  • Purchasing inventory, fixtures, technology, or raw materials
  • Hiring new staff
  • Remodelling your space

MCAs can also be used for working capital, as well as responding to unplanned expenses.

Eligibility


With flexible underwriting requirements, approval criteria for MCAs are much less restrictive than other forms of small business funding, including Canada Small Business Financing Loans.

MCAs make more funding available to more small businesses by evaluating the future potential of the business instead of focusing entirely on credit score and financial history. Your personal and business credit score and financial history will still be considered, but they will be factored in alongside other criteria like your daily sales and business reputation.

Collateral is not required to secure a merchant cash advance.

Rates and fees


Fees for merchant cash advances are based on a factor rate. Unlike interest rates that compound as you pay off your loan, factor rates are simple decimal figures that show how much “extra” you owe on the original amount of the loan. For example, if you borrow $1,000 at a factor rate of 1.5, you’ll owe $1,500.

Because merchant cash advances have shorter terms and are typically easier to qualify for, they may have higher rates than other types of funding. However, it’s a common misconception that MCAs always have higher rates and fees. Ultimately, rates and fees will depend on your business’s risk assessment and how quickly you are able to repay the advance. The stronger your business’s financial history, the lower your rate should be.

Merchant cash advances are ideal for:


  • Business owners that do not have collateral, such as real estate and other major assets
  • Businesses that process a lot of debit and credit card transactions
  • Businesses that need fast funding to support their growth or take advantage of a short-lived opportunities to grow
  • Businesses seeking flexible working capital funding with no restrictions for use
  • B2C businesses that need smaller amounts of funding
  • Businesses with lower credit scores

Canada Small Business Financing Loans vs. Merchant Cash Advances: Which One Is Right For You?


With larger funding amounts, longer terms, and more restrictive qualification criteria, CSBFL loans are ideal for businesses seeking larger loan amounts to help purchase or improve real estate, equipment, or leased property.

Merchant cash advances are ideal for businesses that need fast funding to support growth or cover unplanned expenses, as well as businesses with lower credit scores or no collateral. With less restrictive underwriting requirements and no restrictions on how funds are used, MCAs offer the most flexibility for businesses who may not be approved for CSBFL funding, are seeking smaller funding amounts, or who need working capital to shore up cash flow or help them grow.

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Alfredo Rosing

Alfredo Rosing is the Vice President of Marketing at Greenbox Capital®. With over 25 years of combined experience in marketing and financial services, Alfredo is an expert on innovative financial technologies with a passion for connecting consumers and businesses with socially responsible funding. Prior to joining the Greenbox Capital team, Alfredo launched an award-winning online lender that was recognized as the winner of the 2017 Fintech Awards US Firm of the Year for Lending Innovation Award. Alfredo is a graduate of Southern New Hampshire University with a BS in Marketing.

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