In November last year, the Huffington Post published a noteworthy article on just what it takes for today’s average small business in Canada to obtain a small business loan. Prefacing the article by saying that the small business loan is the “bread-and-butter” of starting, running and growing one’s small business, the article then proceeded in listing out all the requirements that businesses traditionally need to meet in order to obtain said loan.
How many years has the business been up and running? The longer the amount of time, the better. What’s the company’s current debt level? Obviously, that will play a heavy role into what kind of loan product the company can qualify for? What’s the annual revenue of the small business? And what’s the company’s FICO score? If the company’s revenue is low and has a less than a stellar FICO score, it’s likely that business is going to have a rough time getting a small business loan.
The article lists out eight factors that influence a business’ chances of qualifying for a small business loan from a traditional lender. As entrepreneurs and small business owners know all too well, that list of criteria is by no means exhaustive.
The reality is that the world of business lending in Canada is quickly changing. Traditional banks have long been the source of loans for small businesses. But, in recent years, they have shifted away from this customer class, as they have increasingly found that providing loans to small businesses is not worth the risk given the profit margin.
In turn, that’s leaving more small business owners wondering how to obtain the funds they need to expand their product lines or make a renovation or increase their staff.
In 2012, Entrepreneur published a positive case study on a form of alternative lending called merchant cash advance or MCA. The case study described the example of a restaurant owner in Texas struggling to maintain enough operating cash to keep his restaurant running smoothly. Not having the luxury to wait four or five weeks to gain a traditional loan from a bank, the restaurant owner applied for a merchant cash advance from a prominent merchant cash advance company in the United States — he received the funds he needed within 48 hours.
Having existed in the United States for the past fifteen years, merchant cash advances is a form of lending that continues to gain traction in Canada, and particularly among small businesses around the country.
What is a merchant cash advance?
A merchant cash advance involves the sale of a merchant’s future sales, in exchange for immediate cash. More specifically, a merchant cash advance company will approve a lump-sum payment to a small business. The small business will then pay back the loan by automatically giving a predetermined percentage of its future credit and/or debit card sales to the merchant advance company. This automatic percentage deduction on daily transactions is done until the loan is paid-off.
As companies such as Victoria’s Victoria Ice Cream and Fudge Factory and Oh Gelato have learned, the merchant cash advance lending system has plenty to offer, advantages that by and large are non-existent in traditional forms of lending.
For one, there are no fixed monthly loan payments, as found in traditional loans. Businesses that get a merchant cash advance automatically repay their loan every time their business makes a sale.
Even more conveniently, through merchant cash advance lenders, businesses are able to get the cash they need within a matter of hours, not days or weeks or even months.
The merchant cash advance industry has been in Canada for roughly eight years, and in 2013 there were only seven financing companies offering merchant advances. However, with the burgeoning growth in online lenders and with banks continuing to overlook small business needs, the number of merchant cash advance lenders in Canada is certain to grow.
Today, businesses like First Data Canada and Merchant Advance Capital and Business Cash Advance Canada all count themselves on the list of merchant cash advance companies that are benefiting from the business community’s real need for alternative lending.
Although merchant cash advance lending can be more expensive than traditional forms of lending and companies are encouraged to do their due diligence before taking out a loan with a particular MCA provider, with the rate of Canadian small business lending only rising, merchant cash advance lenders are steadily gaining a loyal following and a healthy growth rate.