What is a Merchant Cash Advance

What is a Merchant Cash Advance?

More than ever, small businesses are turning to alternative lending options to raise working capital. According to wagepoint.com this number rose by 60% from 2014 to 2015.  A merchant cash advance is an alternative funding option that business owners can consider. Approval is largely based on the volume of credit card transactions you experience every month.

Qualification for a merchant cash advance may also rely on the following criteria set forth by some Canadian lenders:

  • Your company headquarters is in Canada
  • You have been in business for a required length of time, usually at least 6 months
  • Commercial premises as opposed to e-commerce brand
  • A minimum amount of debit or credit card sales

You will also need to provide the following information and data:

  • Your business information including your company lease
  • Government issued ID
  • A void cheque
  • Bank statements
  • Your merchant ID number

You may be required to provide additional information if you require a large sum of money.

After receiving finance approval and withdrawing the funds, you will then enter an agreement with your lender whereby the lender withholds a percentage of your daily credit card sales each day. This is known as a “holdback” and will continue until the advance is paid in full.  A merchant cash advance isn’t a small business loan but is rather an advance on future credit card transactions that flow through the business’ credit card merchant account. Essentially, businesses agree to sell a portion of future credit card sales at a discount to a merchant cash advance provider.  Merchant cash advances can be used in a number of different ways such as purchasing new equipment or redesigning your premises.

There are a number of reasons a small business might consider a merchant cash advance:

  • There is no fixed time frame with which you have to repay the funds. You can pay it back in your own time.
  • Your credit score may not be as important compared to when seeking other loan options
  • No collateral is needed up front
  • Fast approval times, you can usually get approved quicker than a business loan and the funds will be deposited into your account soon after
  • Your payback is relative to your incoming cash flow.

Nevertheless, you should also consider the following when thinking about a merchant cash advance:

  • Interest rates tend to be a lot higher on cash advances than other financing options. You will typically pay back between 20% – 40% (sometimes even triple digits) of the amount borrowed
  • This type of financing does not build business credit because merchant cash advance providers typically do not report to business credit reporting agencies.
  • By not having a predetermined payment amount it may be difficult to budget accurately.
  • You don’t have the ability to pay reduced interest by making additional payments as you can with business loans.

Based on the above, the following are likely to benefit the most from merchant advances:

  • New businesses with a large number of credit card transactions
  • Store owners without collateral
  • Industries with numerous credit and debit transactions per day – typically over $1,000 a day

If a merchant cash advance is something that you are considering then it is important to be aware of all upfront fees, the projected annual percentage rate for the loan and the outlined terms and conditions. Before making a decision you should first ask yourself whether a merchant cash advance is the best financial solution for your business or whether you are can qualify for an alternative method of financing? The performance of your sales figures throughout the year and whether you can afford to add debt repayments to your expenditure should also be considered when choosing a merchant cash advance.