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📅 Last Updated: April 3, 2023
✏️ Written By Lisa Rennie
🕵️ Fact-Checked by Caitlin Wood

Most businesses could use a little financial help from time to time, especially during the slower parts of the year when cash is not flowing as abundantly as other times. In cases like these, a loan can come in handy to cover various expenses. But there are other financial products that business owners have available to them, including a merchant cash advance.

What exactly is a merchant cash advance, and is it something you should take advantage of?

What Is A Merchant Cash Advance (MCA) In Canada?

A merchant cash advance (MCA) is a way for business owners to access the capital they need to run their businesses, but it is different than a traditional business loan. If a significant portion of your sales is paid for via credit and debit, you can use your future receivables to get an advance of funds. Simply put, a merchant cash advance is an advance based on future credit card sales from your business. This can be a great short-term financing solution for your company, especially if a traditional small business loan doesn’t meet your needs.

How Does A Merchant Cash Advance Work?

With a merchant cash advance, an agreement will have to be made between you and the merchant cash advance provider in terms of the advance amount, the amount you have to repay, and the holdback percentage. When this contract is signed, the advanced funds will be deposited into your account in exchange for a future percentage of your business’ credit card receipts or receivables.

The Holdback Rate 

The agreed-upon percentage of your company’s daily revenues will be withheld by the merchant cash advance provider to repay them, which is known as the “holdback,” and will carry on until the entire advance amount is paid back in full. This holdback percentage is based on the amount of money your business gets, the amount of time it will take you to repay the advance amount, and the size of your monthly receivables

For instance, if the agreed-upon holdback rate is 15%, that means 15% of your credit card transactions would be withheld by the merchant cash advance provider until the full amount is repaid. 

The Repayment Term

Unlike a conventional loan, you pay back a merchant cash advance on your own time without necessarily having to adhere to a specific repayment schedule. There isn’t any rigid time period within which to repay the money in full. Instead, the lender will simply withhold a percentage of your daily sales until you’ve paid back your merchant advance. 

The speed at which you can repay the advance amount is based on how much business your company does every day. The more transactions you carry out, the faster you can pay back the advance. 

The opposite is also true, however: if your business makes fewer transactions, it can take longer to pay back the amount. Like most businesses, the number of daily transactions will change, so more can be paid back on some days, while on others, less will be paid back.

Eligibility Requirements For A Merchant Cash Advance

While requirements for a merchant cash advance approval will vary by lender, there are certain aspects of your business that most lenders will assess. 

  • Card Sales – One of the most basic requirements for a merchant cash advance is whether or not you accept card payments (either Visa, MasterCard, Amex or Debit). 
  • Card Sales Amount – You’ll likely need to have a certain minimum credit and debit card sales per month to qualify. Generally, lenders will want a business that has a minimum of $15,000 per month in combined Visa, MasterCard and debit sales.
  • Time In Business – You may need to have had your business in operation for a certain amount of time before qualifying. Some lenders may have a minimum of 6 full months of processing history for you to be eligible. 
  • No Bankruptcies – Some lenders may have certain conditions like having no bankruptcies in the last 24 months. 

Find out why you were rejected for a business loan.

What Types Of Businesses Can Apply For A Merchant Cash Advance?

Just about any type of business that has customers who pay predominantly by credit card could take advantage of a merchant cash advance. As long as you meet the minimum requirements and you have predictable earnings, this type of financing arrangement may prove to be effective.

Business Financing For Any Industry

Own a business in another industry? Click here

Advantages And Disadvantages Of A Merchant Cash Advance

A merchant cash advance can be beneficial depending on your business needs, but there are certain risks you should keep in mind. 

Advantages Of A Merchant Cash Advance

  • Low Requirements – Unlike a small business loan, a MCA simply requires your card sales to approve you for a loan. Credit scores and other financial factors aren’t typically required to qualify. 
  • Quick Funding –  The application process for a merchant cash advance is a lot simpler than a traditional business loan. 
  • No Fixed Repayments – Your MCA’s payments will adjust according to your card sales and holdback rate. For example, if your hold back rate is 15%, and you make $20,000 in card sales, you’ll pay $3,000 that month. Similarly, if you make $30,000 in card sales the proceeding month, you’ll pay $4,500.  
  • No Collateral – If you don’t have many hard assets to be used as collateral, this is a great option, as your future receivables act as a form of collateral. 

Disadvantages Of A Merchant Cash Advance

  • Higher interest rates – Merchant cash advances tend to come with higher rates and fees compared to a traditional loan.
  • Reduced cash flow – Since a percentage of your credit card receivables will be withheld from the merchant cash advance provider to pay off the cash advance, your cash flow will be affected.
  • Lack of regulation – The rates and fees associated with a merchant cash advance aren’t regulated, so MCA providers essentially have the freedom to charge what they want.
6 Steps To Get A Merchant Cash Advance

How To Apply For A Merchant Cash Advance?

1. Apply For The Advance
Most MCA applications can be completed online. Most lenders will require your bank statements and your card sales data. You’ll also need to provide basic information about yourself and your business such as your name, address, business number, and other pertinent information.
2. Get Approved
Once you provide all the required documents and information your lender needs, your lender will begin its underwriting process. This can take as little as a day to a few days to complete. If you’re approved the lender will require you to set up the card processing for repayment.
4. Set Up Card Processing
Since a portion of your future card sales will be used to repay your lender, you may be required to set up credit card processors if you don’t already have them in place. Then, repayment through the merchant account will start automatically.
5. Review And Sign Contract
Once the repayment method is set up, your lender will provide you with the merchant cash advance contract to review and sign.
6. Get Funded
Once approved, you can expect the funds to be deposited into your business bank account in as quickly as 24 hours to be used as you see fit.

If necessary, Check out these common business funding application mistakes and learn how to avoid them, click here.

What Can You Use A Merchant Cash Advance For? 

You can use the funds received from a merchant cash advance in a number of different ways. Some common uses for merchant cash advances can include:

  • Cover employee payroll
  • Pay for new inventory
  • Cover the cost of new equipment
  • Pay for utilities
  • Expand your business
  • Pay for marketing 
  • Any cost associated with the day-to-day operations

Merchant Cash Advance FAQs

Is collateral required for an MCA?

No, collateral is not required. Since the merchant cash advance is covered by your future cash flow, you don’t need any valuable assets to collateral the advanced funds.

What’s the maximum amount that can be advanced?

Different merchant cash advance providers have different limits, though advances are typically made for anywhere between $5,000 to $50,000. 

What is the average holdback rate?

Again, this would vary from provider to provider, but the average range is between 8% to 30%. 

How long do I have to pay back the funds?

There is no fixed term. The repayment term depends on your card sales. 

Bottom Line

If cash flow is a problem for your business from time to time and you don’t want to go through the motions of applying for a traditional loan, a merchant cash advance might be a great option for you.

Caitlin Wood Priyanka Correia Lisa Rennie Bryan Daly Cris Ravazzano Margaret Johnson Kale Havervold Liz Enriquez Sean Cooper Veronica Ott Corrina Murdoch Chrissy Kapralos

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