Merchant Advance Business Short Term Working Capital Business Funding Funding

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.

 

 

 

 

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.

 

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."

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.