Merchant cash advances (MCAs) are a form of alternative small business funding that emerged after the 2008 recession in response to a growing need for accessible financing. With a simpler application, faster turnaround, and more flexible approval requirements, merchant cash advances have made more working capital available to business owners who may not be approved by the Canada Small Business Financing Program or other traditional lenders like banks and credit unions.
Despite being a practical and popular source of funding in Canada for over a decade, many myths and misconceptions persist about merchant cash advances. Many of these myths come from a simple lack of understanding about how merchant cash advances work. Couple their relative youth and ease of access with the sometimes secretive tactics used by disreputable lenders and aggressive brokers and it’s easy to see why merchant cash advances have developed a bit of a bad reputation.
In reality, MCAs are a regulated and legitimate form of funding, and they can be very helpful to small business owners looking for working capital, especially if you need funding quickly and your business processes a lot of credit card transactions.
To help clear up the confusion, we’re addressing 6 of the most common myths about merchant cash advances, including the beliefs that MCAs charge exorbitant fees, are unregulated and inherently predatory, and more. Let’s jump in.
Myth 1: Merchant cash advances are loans
Merchant cash advances are a form of small business funding, but they are not technically a loan. Technically, MCAs are a “purchase of future receivables”, which means that your lender is essentially purchasing a portion of your future credit and debit card sales. You’ll receive a lump sum of cash up front similar to a traditional loan, but instead of adhering to a fixed repayment schedule over a specific term, a percentage of your daily or weekly credit card sales will be automatically deducted from your business bank account till your advance is repaid in full (plus any fees).
There are a couple of other key differences between how MCAs and loans function: with an MCA, the amount you receive is based on your projected future sales, while a traditional loan will base your funding amount on your credit history along with a number of other factors. And unlike traditional loans, MCAs do not require collateral.
Myth 2: MCAs have higher fees than other forms of funding.
The belief that MCAs are drastically more expensive than other forms of small business funding is one of the most common misconceptions about this form of alternative funding.
Instead of a standard interest rate like CSBFP loans and banks charge, merchant cash advances will use something called a “factor rate”. Unlike interest rates, which can compound as you pay off your loan, a factor rate is a simple decimal figure that shows how much “extra” you will owe on the original amount of the loan. For example, if you borrow $1,000 at a factor rate of 1.3, you’ll owe $1,300. Your factor rate is determined based on your risk assessment, so the stronger your business’s financial history, the lower your rate should be.
Because of their flexible approval requirements, faster turnaround, and shorter terms, MCAs may come with higher borrowing costs than traditional term loans. However, this does not guarantee that an MCA will be costlier than other types of funding. Ultimately, the cost of your MCA will depend on your risk assessment and how quickly you are able to repay the advance.
Myth 3: Merchant cash advances are inherently predatory
Disreputable alternative lenders will approve 2nd, 3rd, and 4th merchant cash advances, making it easier for business owners to fall into a dangerous cycle of “stacking” MCAs to pay off their existing MCA.
Reputable lenders, on the other hand, know that the success of the businesses they lend to is directly related to their own success. There is no incentive to fund businesses that are unlikely or unable to repay their advance.
Greenbox Capital® prides itself on providing responsible funding. We’ll never over-leverage your business, and we never engage in loan stacking. Your success is what matters most.
Myth 4: Repayments are fixed in advance
With an MCA, your payments are not fixed. Instead, your payments will be based on a percentage of your daily or weekly credit card sales. On days or weeks with fewer sales, your payments will be smaller. On days or weeks with higher sales, your payments will be higher and your advance will be repaid faster.
Some business owners prefer the set monthly repayment schedule of a traditional term loan, while others find the smaller, more frequent automatic repayments of an MCA to be less of a strain on their cash flow.
Myth 5: Merchant cash advances are only for businesses with low credit scores
While it’s true that MCAs have different approval requirements that are more favorable to businesses with lower credit scores, businesses with high credit and strong financial histories can still benefit from MCA funding.
Even businesses with strong credit and proven financial histories are often rejected by government funding programs and other traditional lenders. If you do meet the stringent approval requirements of these lenders, many business owners appreciate the speed and flexibility of MCA funding, making MCAs a compelling option for all businesses regardless of credit score.
Myth 6: MCAs are only for failing businesses
Failing businesses are less likely to be able to repay their advance, and there’s no advantage to lending to a business that isn’t able to repay their funding! To ensure you are able to repay your advance, most MCA providers, including Greenbox Capital, will stipulate a minimum monthly sales requirement and will often require proof that your business has met this minimum over a period of consecutive months.
While merchant cash advances can be used to shore up cash flow and manage unexpected expenses, they are best used to help fuel business growth or scale up rapidly. If an MCA can help you boost your marketing, purchase inventory in bulk for lower rates, acquire raw materials to pitch a big project, or support any other action that will help increase your revenue, you are more likely to successfully repay your advance on a faster timeline. A growing business is not a failing business!
Is a merchant cash advance right for your business?
Many myths and misconceptions persist about merchant cash advances. The beliefs that they have the highest rates, they’re only for failing businesses, and they’re unregulated and inherently predatory are unfounded; in reality, merchant cash advances offer a number of advantages over financing options offered by traditional lenders, including a simplified application, flexible approval requirements, and faster application turnaround. With funding available in as little as one business day, many businesses can benefit from a merchant cash advance, including businesses with strong financial histories.