Merchant Advance Business Short Term Working Capital Business Funding Funding

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Thrive, Not Just Survive: The Role of Short Term Working Capital Loans in Canadian Business Financing



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Canadian Business Financing: A Deep Dive into Merchant Cash Advance & Short-Term Working Capital Loans 


Business financing is a key element in the success and growth of every company.


Understanding your choices becomes imperative, especially in Canada, where the vibrant business ecosystem demands an array of financing options.


Numerous companies experience phases of financial strain, where liquidity becomes a concern. For certain businesses, these challenges arise periodically due to erratic sales cycles. However, whether this predicament occurs infrequently or regularly, the absence of working capital to support day-to-day operations and stimulate expansion can prove detrimental to any business.


While the big corporations on Bay Street might be flush with options such as a traditional bank loan option/business line of credit,  where does the smaller business turn?


One growing alternative is the Merchant Cash Advance / Short-term working capital loan


Why Merchant Cash Advance?


Merchant Cash Advances (MCAs) have been gaining traction primarily because of their focus on supporting businesses that may not fit the traditional bank loan model for lending but still require funding for operating expenses / unexpected business expenses.


Thousands of businesses, including retail businesses, restaurants, and those with strong credit card transactions are in the limelight as they have little or inconsistent accounts receivable and monthly revenue fluctuates.


Many wonder why this option isn't available as a small business loan from their traditional bank. The truth is, that working capital loan solutions and traditional bank loans cater to different requirements and risk profiles as well as the conventional criteria around a business credit score and the owner's personal credit score.


How Does a Merchant Cash Advance Work?


This method of funding a business focuses on financing via a lump sum based on a business's sales revenues. Unlike traditional bank loans that can be "obsessed" with ratios, covenants, and guarantees, MCAs are more flexible. They don't necessitate collateral in the form of business assets, and their terms are relatively shorter, ranging between 1 to 18 months.

Businesses can anticipate funds amounting to 10 to 20% of their annual sales or projected credit card sales. It's a speedy way to access funds, essentially allowing businesses to leverage their future sales today.



Benefits of Short-Term Working Capital Loan via MCAs


These short-term working capital loans are not just about bridging financial gaps.  Working capital loans tend to be flexible and they empower businesses to:

  • Take advantage of supplier discounts
  • Boost inventory purchases
  • Improve Accounts Receivables and inventory turnover ratios


Essentially, they can significantly enhance a company's return on equity strategy.


The significance of working capital for business growth cannot be overstated. However, nearly every business encounters phases when their available working capital is constrained, yet operational expenses must still be met. In such situations, a working capital loan emerges as a valuable solution, smoothing out cash flow fluctuations and bolstering the business's prospects for success.


Noteworthy benefits of a working capital loan/ merchant cash advance

  • Quick Access: Working capital loans are typically accessible with remarkable speed, often within 24 hours, enabling business owners to promptly address short-term financial exigencies.

  • Lump Sum Disbursement: Most working capital loans are disbursed as a single lump sum, simplifying financial management.

  • Collateral Flexibility: Certain working capital loans can be secured without the need for collateral, reducing the risk for borrowers.

  • Equity and Control Preservation: Business owners are not obliged to relinquish equity or control over their organization when securing a working capital loan.

  • Flexible Repayment: Lenders typically offer the flexibility to tailor loan repayment schedules to align with the business's cash flow, alleviating financial strain during periods of reduced activity.




Making the Right Choice in Business Financing


Every business is unique, and while this financing is growing in popularity, they aren't a one-size-fits-all solution. Evaluating if such a financing model aligns with your business needs, objectives, and financial health is essential. In some cases, business credit cards might make sense.

Conclusion: Is Merchant Cash Advance the Right Fit?


Choosing the right financing strategy is pivotal to a business's sustainability and growth. If you find yourself at a crossroads, unsure which path to take, seeking expert advice can illuminate the way.


7 Park Avenue Financial, with its wealth of experience and credibility in Canadian business financing, is poised to guide you in making that crucial decision, ensuring you select the financing option that best supports your business ambitions.


Talk to 7 Park Avenue Financial about other options to solve the working capital challenge

  1. Term loan: A lump sum, repaid with interest in regular installments over a predetermined period. This loan can be secured or unsecured.

  2. Business line of credit: Similar to a bank overdraft facility, allowing borrowers to withdraw and repay funds from a flexible loan account. Borrowing is subject to credit limits and minimum payment conditions. It can be secured or unsecured.

  3. Business credit card: A credit card with a fixed borrowing limit in the business's name. Typically unsecured, though often associated with higher interest rates and fees.

  4. Merchant cash advance: Borrowing against credit card receipts, repaid as a percentage of monthly or weekly card sales income. Suitable for businesses primarily receiving customer payments via credit or debit cards. Card sales provide collateral, usually eliminating the need for additional security.

  5. Invoice financing: Also referred to as accounts receivable financing. Companies sell or borrow against the value of outstanding accounts receivable (unpaid customer invoices). The invoices themselves serve as collateral, typically eliminating the need for additional guarantees.





What are merchant cash advances?

A merchant cash advance is a  financing option for small businesses that allows them to repay a small business loan / working capital loan via the merchant cash advance contract with funds from a percentage of the company's sales. Merchant cash advance repayments are tailored to the cash flows and sales of the business via a small business loan structured as term loans  -


Analyzing a company's sales and business bank statements allows a merchant advance lender to determine the maximum loan amount.


Why might a business in Canada consider an MCA over traditional bank financing?


Merchant cash advance providers cater to businesses that may not meet traditional banking criteria. They offer quicker access to funds, don't require collateral like business assets, and are more focused on sales revenues than stringent bank criteria for small business loans.



Who stands to benefit most from Merchant Cash Advances?


Given their consistent and traceable revenue streams, retail businesses, restaurants, and companies with robust credit card transactions are prime candidates for MCAs when a business credit limit solution via traditional financing is not available - Some retail merchants qualify based on future credit card sales. But any firm with stable or growing sales ultimately qualified for this type of funding.


 How does an MCA impact a company's return on equity strategy? 


These loans can bolster a company's return on equity by allowing it to capitalize on supplier discounts, enhance inventory purchases, and improve turnover ratios, effectively leveraging future sales in the present.


Can every business take advantage of short-term working capital loans in Canada?


While popular, they aren't suitable for every business. A business must evaluate its needs, objectives, and financial health before opting for an MCA.

The documentation necessary for securing a working capital loan depends on the desired loan amount and your business type.


Commonly requested documents encompass:

  • Business Overview: A description of your business and a list of key customers/suppliers.

  • Financial Statements: This includes your current Balance Sheet and cash flow projection.

  • Income History: An Income Statement providing a historical record of income and expenditures.

  • Bank Records: The most recent 6 to 12 months of your business's bank statements.

  • Tax Information: Business Tax Returns for the last three years, if available.

  • Loan Purpose: A clear explanation of the purpose for the loan, specifying the amount needed and how the funds will be utilized, such as for "inventory purchasing."



How does the repayment of a Merchant Cash Advance work?


Typically, businesses repay MCAs as a percentage of their daily or monthly sales, making it a flexible repayment structure that aligns with their revenue flow. Interest rates are higher for these types of installment loans.


Are there any hidden fees associated with Merchant Cash Advances?


While MCAs can be straightforward, it's crucial to understand the complete cost structure. Apart from the principal, there may be factors or fees. Always scrutinize agreements and work with reputable providers.


Is the MCA industry regulated in Canada?


The industry in Canada isn't as heavily regulated as traditional banking, which allows for flexibility but also demands small business owners to be vigilant and informed.


How does the interest rate of a cash flow loan compare to traditional loans?

Given their associated risks and flexibility, unsecured working capital loans often have a higher effective interest rate than traditional bank loans and invoice factoring or invoice financing. It's crucial to evaluate the cost and benefits before opting for one. Also, in the majority of cases, a personal guarantee will be required, as often the positive personal credit score of the owner may differ from the poor credit of the company.


Can a business opt for both traditional bank financing and an MCA simultaneously? 


Yes, a business can combine financing methods. However, it's essential to manage debt obligations carefully and ensure the combined repayments are sustainable for the business's cash flow.


What is working capital?


Working capital is determined by deducting a company's total current liabilities from its total current assets. Current assets encompass cash, accounts receivable, inventory, and other assets projected to be converted into cash within a year.

On the other side, current liabilities comprise accounts payable, wages, taxes payable, and the portion of long-term debt due within a year. If the outcome demonstrates an excess of assets, it's referred to as positive working capital. Conversely, when the result shows greater liabilities than assets, it's termed negative working capital.


What are the potential risks of working capital loans for business owners to consider?


Due to their short-term nature and frequent absence of significant collateral requirements, working capital loans typically come with higher interest rates compared to other types of debt financing.

In cases where businesses have limited or no established cash flow history, obtaining a working capital loan may necessitate a connection to the business owner's personal credit. Any missed payments or defaults could potentially harm the individual's personal credit score.

The elevated interest rates associated with short-term working capital loans make them less suitable for financing substantial investments or large-scale expenditures.



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Stan Prokop is the founder of 7 Park Avenue Financial and a recognized expert on Canadian Business Financing. Since 2004 Stan has helped hundreds of small, medium and large organizations achieve the financing they need to survive and grow. He has decades of credit and lending experience working for firms such as Hewlett Packard / Cable & Wireless / Ashland Oil