Merchant cash advances in Canada: how they work and what they cost

A merchant cash advance is not, strictly, a loan. A funder buys a slice of your future sales at a discount: you get a lump sum now, and pay back a larger fixed amount out of what the business takes in over the coming months.

They are fast, they are widely available, and they are easy to misprice in your head. Here is how to read one.

How a merchant cash advance works

1. You receive a lump sum — say $50,000.
2. You agree to repay a fixed larger amount — say $65,000.
3. Repayment comes out of your sales, either as a percentage of card sales (the holdback) or as a fixed daily or weekly debit from your bank account.
4. When the full $65,000 has been paid, it ends.

The difference between the two numbers — $15,000 here — is the cost. There is no interest accruing; the cost is fixed on day one.

The factor rate

Advances are usually quoted with a factor rate: the number you multiply the advance by to get the total you repay. $50,000 at a 1.30 factor is $65,000.

A factor rate looks like a small number. It is not an interest rate, and it does not behave like one. A 1.30 factor repaid over twelve months, six months or four months is the same $15,000 of cost — but squeezed into fewer months, the same dollars amount to a much higher annual cost.

That is why the only fair comparison is in dollars, over time:

• What is the total I repay?
• How much leaves the account each day or week?
• Roughly how many months will it take?

What working capital costs works through a real example.

Holdback or fixed debit

A percentage holdback rises and falls with your card sales. A slow week means a smaller payment, which is genuinely useful for seasonal businesses. It also means the advance runs longer when trade is slow.

A fixed daily or weekly debit is the same amount regardless. Easier to plan around, harder on a bad week. Most advances in Canada now work this way.

Ask which one you are being offered, and what happens if a debit bounces.

When an advance makes sense

• You need money very quickly and have strong, regular sales.
• The money buys something that pays back fast — stock that sells in weeks, a job with a known margin.
• You have been declined elsewhere and the cost, in dollars, still leaves the purchase worth making.

When it does not

• To cover a gap that keeps coming back. An advance for a timing problem usually leads to another advance, and stacking — taking a second before the first is paid — is where businesses get into real trouble.
• When a cheaper product fits the same need. A line of credit for uneven months, equipment financing for a machine.
• When you cannot get a straight answer on the total.

Renewals

Many funders offer to renew an advance partway through: pay off the balance with a new, larger advance. Sometimes that is fine. Often it means paying the cost of the first advance in full for money you mostly already had. Ask what the payoff figure is today, and how much new money you would actually receive.

How this compares with what we place

We place four products: term loans, revenue-based lines of credit, asset-based lending and equipment financing. Some of the lenders we work with quote their cost the way advances do, as a fixed total — which is why every offer we pass on shows the total you repay, the payment and the number of payments before you decide anything.

If you are weighing a lump sum against a line, an advance or a line of credit? is the short version.