How to Get a Merchant Cash Advance in Canada

At Financial Canadian, we understand that small businesses often need quick access to capital. A merchant cash advance in Canada can be an attractive option for many entrepreneurs facing short-term cash flow challenges.

This financing solution offers a unique approach compared to traditional loans, with potential benefits and drawbacks that business owners should carefully consider.

In this guide, we’ll explore how to obtain a merchant cash advance, its key features, and whether it might be the right choice for your Canadian business.

What Is a Merchant Cash Advance?

Definition and Basic Concept

A merchant cash advance (MCA) is a financial product that provides businesses with upfront capital in exchange for a portion of their future credit card sales. This funding option has gained popularity in Canada, especially among small businesses that need quick access to cash.

How MCAs Operate

When a business receives an MCA, they get a lump sum of money upfront. In return, they agree to pay back the advance plus a fee through a percentage of their daily credit card sales. This percentage (often called the holdback rate) typically ranges from 10% to 20% of daily sales.

For example, if a business receives a $50,000 advance with a factor rate of 1.2 and a 15% holdback rate, they would owe $60,000 in total. Each day, 15% of their credit card sales would go towards repaying this amount until it’s fully paid off.

Key Differences from Traditional Loans

MCAs differ significantly from traditional bank loans:

1. They’re based on future sales rather than credit history. This means businesses with poor credit can still qualify if they have strong sales.
2. Repayment is flexible. On days with higher sales, businesses pay back more, while on slower days, they pay less. This can be advantageous for businesses with seasonal fluctuations.
3. MCAs are typically faster to obtain than traditional loans. While bank loans can take weeks or months for approval, MCAs can often receive approval and funding within days.

Common Use Cases in Canada

In Canada, businesses use MCAs for various purposes:

• Restaurants often use them to purchase new equipment or renovate their spaces.
• Retail stores might use an MCA to stock up on inventory before busy seasons.
• Service-based businesses might use the funds for marketing campaigns or to cover payroll during slow periods.

A recent study by the Canadian Federation of Independent Business revealed that nearly a third (32%) of Canadian small businesses expect their capital investments to decrease over the next two years. MCAs can provide a quick solution to short-term cash flow problems.

However, it’s important to note that MCAs come with higher costs compared to traditional loans. The annual percentage rate (APR) can often exceed 50%. Therefore, businesses should carefully consider their financial situation and explore all options before choosing an MCA.

Now that we understand what a merchant cash advance is and how it works, let’s explore the eligibility requirements and application process for obtaining an MCA in Canada.

How to Qualify and Apply for a Merchant Cash Advance in Canada

Eligibility Requirements for Canadian Businesses

To qualify for a merchant cash advance (MCA) in Canada, your business must meet specific criteria. Most MCA providers require:

• At least six months of business operation
• Generate > $1,000 in monthly credit/debit card volume
• A personal credit score above 500 (this can improve your chances and potentially lead to better terms)

MCA providers may also evaluate your business’s overall financial health, including cash flow and payment history with vendors. Businesses in high-risk industries or those with a history of bankruptcy might face additional scrutiny.

Step-by-Step Application Process

The application process for an MCA is typically quick and straightforward. Here’s what you can expect:

1. Initial Inquiry: Contact an MCA provider or complete an online application form. You’ll need to provide basic information about your business, including average monthly credit card sales.
2. Document Submission: If your initial application looks promising, you’ll submit supporting documents, which typically include:
3. Recent bank statements (usually the last 3-4 months)
4. Credit card processing statements
5. Business tax returns
6. Proof of business ownership
7. Review and Offer: The MCA provider will review your application and documents. If approved, they’ll present an offer detailing the advance amount, factor rate, and estimated repayment period.
8. Acceptance and Funding: If you accept the offer, you’ll sign the agreement. Funds can often be deposited into your account within 24-48 hours.

Key Considerations During Application

When you apply for an MCA, keep these important points in mind:

1. Provide Accurate Information: Be truthful about your business. Discrepancies can lead to delays or rejection.
2. Understand the Terms: Fully comprehend the factor rate, holdback percentage, and estimated repayment period before accepting an offer.
3. Have a Clear Purpose: Know exactly how you plan to use the funds. This can help you determine if the advance amount and terms align with your business needs.
4. Compare Offers: Don’t settle for the first offer you receive. Compare terms from multiple MCA providers to ensure you’re getting the best deal for your business.
5. Read the Fine Print: Pay attention to any additional fees or conditions in the agreement.

Common Documents and Information Needed

To streamline your MCA application process, prepare the following documents and information:

1. Business Information:
2. Legal business name and DBA (if applicable)
3. Business address and contact information
4. Type of business entity (e.g., sole proprietorship, corporation)
5. Industry classification (SIC or NAICS code)
6. Financial Documents:
7. Bank statements (last 3-4 months)
8. Credit card processing statements
9. Business tax returns
10. Profit and loss statements
11. Personal Information:
12. Owner’s name and contact information
13. Social Security Number or Social Insurance Number
14. Personal credit score (if available)
15. Additional Information:
16. Time in business
17. Average monthly revenue
18. Desired advance amount
19. Purpose of the funds

Now that you understand the qualification and application process for a merchant cash advance in Canada, it’s important to weigh the advantages and potential drawbacks of this financing option. In the next section, we’ll explore the pros and cons of MCAs to help you make an informed decision for your business.

Weighing the Pros and Cons of MCAs

Speed and Accessibility

Merchant Cash Advances (MCAs) increase the availability of financing for establishing, expanding, modernizing and improving small businesses, by sharing the risk with lenders. This can be particularly beneficial for businesses facing urgent cash flow needs or time-sensitive opportunities.

MCAs also open doors for businesses with less-than-perfect credit scores. A study by the Canadian Federation of Independent Business found that 26% of small business owners struggle to access financing due to poor credit history. MCAs prioritize your business’s sales performance over credit scores, making them a viable option for many businesses that might not qualify for traditional loans.

Flexible Repayment Structure

The repayment structure of MCAs aligns with your business’s cash flow. You pay back more on days with higher sales and less on slower days. This flexibility benefits seasonal businesses or those with fluctuating income.

However, this flexibility comes at a price. The effective annual percentage rate (APR) of MCAs can significantly exceed traditional loans, often surpassing 50%. A report from the Financial Consumer Agency of Canada cautions that the high cost of MCAs can potentially trap businesses in a debt cycle if not managed properly.

No Collateral Required

Unlike many traditional loans, MCAs don’t require collateral. This advantage appeals to businesses without significant assets or those unwilling to risk personal property. The lack of collateral, however, contributes to the higher costs associated with MCAs.

Impact on Cash Flow

While MCAs provide quick cash, they can significantly affect your daily cash flow. The automatic deductions from your credit card sales can reduce your working capital, potentially creating challenges in covering other business expenses.

A survey by Payments Canada revealed that 65% of small businesses consider cash flow management a top priority. Before taking an MCA, you should carefully project how the daily repayments will affect your operational cash flow.

Comparison with Other Financing Options

When considering an MCA, compare it with other financing options available to Canadian businesses:

1. Business Line of Credit: These offer more flexibility in borrowing and repayment but typically require better credit scores than MCAs.
2. Equipment Financing: If you need funds specifically for equipment purchases, this option often offers lower interest rates than MCAs.
3. Invoice Factoring: This can serve as a good alternative if your business has outstanding invoices, potentially offering lower costs than MCAs.
4. Government Grants: The Canadian government offers various grants for small businesses (which don’t require repayment). However, the application process can be lengthy and competitive.
5. Peer-to-Peer Lending: This emerging option can offer lower rates than MCAs for businesses with good credit scores.

Final Thoughts

Merchant cash advances in Canada offer a unique financing solution for businesses seeking quick access to capital. These advances provide speed and flexibility that traditional loans often can’t match, making them an attractive option for many Canadian entrepreneurs. However, the decision to pursue a merchant cash advance should not be taken lightly, as the high costs associated with MCAs can significantly impact your business’s financial health if not managed properly.

We at Financial Canadian understand the importance of making informed financial decisions for your business. The future of merchant cash advances in the Canadian market looks promising, with continued growth expected as more businesses seek alternative financing options. However, as the market evolves, we may see increased regulation and competition, potentially leading to more favorable terms for borrowers.

Whether you consider a merchant cash advance or explore other financing options, it’s essential to align your financial strategies with your overall business goals. We specialize in web design services to help businesses establish a strong online presence (while also recognizing the need for comprehensive financial planning). You can make the best decision for your Canadian business’s financial future through thorough research and careful planning.