A merchant cash advance or business advance is an innovative loan alternative that provides business owners with working capital in exchange for a small portion of their future credit and debit card sales. Used primarily for short term cash flow opportunities or emergencies, the advance amount is typically equal to 1-2 months of expected future sales. The advance is repaid on a daily basis using a small percentage of daily sales so, unlike a loan there is no fixed monthly amount. This repayment model fluctuates with sales trends giving the business owner greater flexibility to manage cash flow, particularly during slow seasons. This method of small business financing is popular with restaurants, clothing stores, tourist related businesses and other seasonal industries.
The most innovative feature of this type of loan alternative is that approval is based on the sales history of the business rather than the personal credit history of the business owner.
The merchant cash advance industry was introduced in the US about ten years ago and came to Canada about five years ago. The industry is growing significantly on both sides of the border for the same reasons:
a) The economic meltdown in 2008 caused traditional financial institutions to clam up and virtually ignore the small business community – seems like this is continuing into 2012 (and beyond?)
b) Traditional commercial lenders do not provide financing for inventory or any other working capital related expenses. In other words, if it’ s not a fixed asset….forget about it
c) For small businesses, banks typically look at the personal credit history of the owner rather than the performance of the business. Any “black marks” on your personal credit? …forget about it
The merchant advance industry is relatively new in Canada and, as such, there’s a wide variety of providers jumping into the business. Companies range from huge multi-national companies based in fun places like Detroit or New York to very small brokers/sales agents working out of their home and/or the trunk of their car.
If you’re considering a merchant advance as your small business loan alternative, make sure you do your homework and make sure to get references from existing customers.