Merchant Cash Advance

What is a  Merchant Cash Advance MCA:

A merchant cash advance is a financing option that allows businesses to receive an upfront sum of money in exchange for a percentage of their future credit card sales. The MCA provider advances funds to the small business based on its average credit card transactions, essentially purchasing a portion of the business’s future sales. The merchant cash advance repayments are automatically deducted from the business’s credit card payments, ensuring a seamless process that aligns with the company’s flow of cash.

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 small 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 can be a lifeline for Canadian businesses in need of quick 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 financing options.

How Does A Merchant Cash Advance Work?

A Merchant Cash Advance (MCA) is a financial solution designed to offer small business owners quick access to working capital by selling a portion of their future credit sales. Unlike a traditional loan, an MCA is an unsecured loan, which means no collateral is required.

The advance is provided by a merchant cash advance company, with repayments made through a percentage of daily or weekly credit card transactions. This financing option is particularly appealing to businesses with fluctuating revenues or those that rely heavily on credit card sales.

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.

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.

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:

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 process 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 sales. 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.