Rapid and reliable money is an attractive financial product to most small enterprises due to the fact that these businesses want to capitalize fast. Since the last couple of years, there has been a lot of talk about a specific product, a merchant cash advance (MCA). Unlike a loan, an MCA is a transaction in which the lender ‘purchases’ a specific percentage of the company’s future revenue amiably future credit card receipts or debit card receipts. This arrangement provides an upfront payment against the future sales, with all the payments (including the advance) based on the firm’s performance and the flow of cash or revenue. Its appeal often lies in this unique structure that allows money to be obtained extremely fast, especially for businesses dealing with cash receipts of a huge volume. Any entrepreneur in Canada’s current environment who wishes to use it must avail themselves of how this kind of financing works.
The actual application for such funds is in most cases much simpler than the process of getting an easy to get business loan with a bank. MCA’s lenders, specifically examine a company’s overall daily sales output of credit and debit cards more than any history of high credit scores or the presence of high risk secured loans. This focus on revenue, something that is verifiable, simplifies the evaluation process and as such, the main REGULATION or requirement is such recent bank statements and statements showing credit card processing. The sharpness with which Submission and reviewing of documents occurs is so immense that confirmation or denial of application is very soon after document review – as much as hours in some instances. In most cases, after approval, disbursement of the funds is done within a day or two preventing the unit from shutting down because of insufficient working capital or stopping work to pursue opportunities because of lack of funds. This is in marked contrast to the months leading to loans during the processing phase.
Repayment Methods
It is this stage of the repayment and collection that the peculiar aspects of merchant cash advance come to prominence. Different from a bimonthly repayment, instead, a portion of the credit and debit card transaction is directly used to pay for the advance, pro rata, which may be called ‘holdback’ or ‘retrieval rate’. As such, when the business opts for, say, 10% holdback, every dollar collected by way of card transaction, 10 cents will automatically be put aside for the purpose of repaying the advance with an additional fixed amount (known as the factor rate) until both of these are repaid. This ‘flexible’ repayment plan is characteristic; the larger transactions and sales usually result in larger payoffs, while smaller amounts are taken several days later. Many adjust such payments to a business’s real cash flow that some relieve payment anxiety when business levels are low.
The ‘factor rate’ is one of the key aspects in understanding how much will be paid with an MCA loan. The factor rate, unlike interest, is fixed and is applied to the loan amount that is taken. For example, a business will receive an advance of $50,000 at a rate of 1.2 and the total sum that is to be repaid will be $50,000 x 1.2 =$60,000. While it is simple as it sounds, it is important for the business owner to work out the effective annual percentage rate (APR) for this factor rate so that it is appreciated relative to other loans costs. When the high cost of money involved in MCA is annualized, the effective APR exceeds that of the conventional loans – in certain cases even three figures – and this is critical for businesses that are conscious of costs.
Factors in Practicing an MCA
Comparatively, there is not that much involvement from the business owner further after the advance has been received and the repayments are in progress. This is because; due to the process being automated, payments are not expected to be made physically nor the date of deadlines memorized. This mode of payment is quite beneficial but still requires strategic planning in monitoring the cash flow daily in order to avoid overreliance on the operating cash.
It is much more effective for businesses to use an MCA if they have a steady influx of credit cards and/or debit cards. A considerable number of businesses that are largely dependent on cash, in the form of check or invoices, may not find the MCA fitting because the mode of repayment is linked to the card-specific sales. Also, even though there is some liberty in seeking to adjust payments according to sales, firms need to be careful in estimating how much the frequent daily or weekly payments will affect operations hence liquidity. Although MCA occupies two corners in the market space as far as access to funds is concerned – the first is in terms of speed where interventions and access to funds are maybe needed within a matter of hours and the second is for businesses with poor credit ratings and require credit facilities – it is important to note the very dynamics and cost structure of MCA in an in depth manner before considering them in Canada.
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