Merchant Advances in CanadaBy Caitlin in Loans
When a business needs money, they can use a merchant advance to get immediate access to funds. A merchant advance is basically the selling of a business’s future sales for an immediate influx of cash. For example, let’s say you ran a small grocery store, but didn’t have enough money one week to pay for product. Obviously you can’t run a business without product, so you would get a merchant advance in order to pay for the product. The lender will give you a lump sum of cash. In exchange, you’re giving up a percentage of your future profit to the lender. For example, you might agree on a 20% rate. That means 20% of every debit card and credit card purchase will go to the lender until your debt is paid.
How It Works
To get a merchant advance, a company will have to complete an application process. During this application process, the business that wants the advance will have to detail how much they want and how much they’re currently making. Using this information, the lender will decide how much they’re willing to give the business and what the terms of the agreement are. The business then chooses to either accept or decline those terms. Once they accept, they’re given a lump sum of cash in order to run their business, with the expectation that they’ll pay it back with interest.
A merchant advance may sound similar to a bank loan, but there are a few differences. Unlike bank loans, merchant advances do not have fixed terms or interest rates. The fundings are also unsecured. This means that if the business goes bankrupt and is unable to make a payment, the lender won’t be able to recoup their loan through collateral. Merchant advances are higher risk for the lender; the benefit being that they’re able to charge a higher interest rate.
The biggest advantage of a merchant advance is the speed in which it can be processed. Unlike bank loans, which have an involved application process that can take months to complete, a merchant advance can be approved within a few business days. This is ideal for companies looking to get a cash injection so they can purchase inventory immediately. Well run businesses can take advantage of merchant advances and use them to boost sales and growth.
Another advantage is that, unlike bank loans, merchant advances offer flexible repayment plans. Repayment is based on a percentage of sales. For example, if a business makes lots of sales in July, a percentage of those sales will go towards repaying the lender. However, if they make almost no sales in August, they’ll only lose a percentage of those sales. Rather than being forced to pay a set amount every month – a condition which can force companies behind the proverbial eight-ball – their repayment is tied to their sales, meaning one bad month won’t hurt them.
As merchant advances are not legally a loan but rather seen as a purchase of future sales, they are not bound by the same laws that apply to banks and other financial institutions. Because of this, the interest rate on a merchant advance is usually higher than it would be for a line of credit or loan. The industry is also unregulated, which means businesses need to choose wisely before deciding whether to use a merchant advance or not.