This article is part of The Globe and Mail’s Small Business Borrowing Guide series, published weekly on The Globe’s Entrepreneurship page until November.
When David Gens started his finance company, Growth of merchants10 years ago, cash advances to merchants were not a well-known product in Canada.
A small business uses a cash advance from a merchant to receive capital now and repays it as a percentage of future debit and credit card sales. Unlike a fixed-term loan, the repayment period can vary depending on the sales of the business.
Mr. Gens, who worked in the investment industry, found that merchant cash advances were increasingly popular in the United States. With few Canadian companies offering the product, he decided to start his own business, Merchant Advance Capital.
The Vancouver-based company – recently renamed Merchant Growth – has advanced more than $ 250 million to more than 4,500 companies.
“I’ll never be the cheapest credit provider, because banks have an inherent advantage in terms of the cost of their funds,” says Gens. “But I can be the most convenient source of financing for small businesses and that’s the vision I’ve rallied the company around.”
Merchant Growth offers small business owners two types of merchant cash advance products, as well as business lines of credit. A merchant cash advance product called Flex Solution is repaid daily, based on a fixed percentage of daily debit and credit card sales, ranging from 4% to 15%.
The other merchant cash advance product, Fixed Solution, deviates from the usual cash advance model and involves repaying a fixed amount daily or weekly, rather than a percentage of sales.
“This product has allowed us to extend credit to businesses that haven’t really integrated credit card sales,” Gens said. “Then when we started offering it, we found that some business owners just preferred to know exactly what was coming out of the account each week. “
With both products, the amount of the cash advance ranges from $ 5,000 to $ 500,000. Mr. Gens says the average amount is around $ 40,000. The average duration is estimated at 12 months, but for the Flex Solution this number may vary depending on the company’s sales.
For both products, businesses with minimum average monthly sales of $ 10,000 and a minimum of six months of activity are eligible. Merchant Growth takes into account personal and business credit scores and business bank statements.
Among small business owners who apply to Merchant Growth, between 65 and 70 percent are approved for funding, says Gens.
Does Merchant Growth live up to its claims? A small business owner who has used the Flex product three times shared his experience with The Globe and Mail.
Carlos Taylhardat, Managing Director of Art of Headshots, a Vancouver-based photography company with seven locations across Canada, first used a merchant cash advance from Merchant Growth in 2016.
Before speaking to Merchant, Taylhardat says he researched financing options with banks. But because he doesn’t own a house, he says he struggled to get a loan.
“If you don’t have equity, if they can’t take something from you, they won’t lend you money,” he says. “It’s very difficult for a business owner to be able to borrow money. “
Merchant Growth lends money differently from banks, says Taylhardat. He filled out a simple online request and got a quick response, receiving the money within days.
Mr. Gens says that on average it takes about four days from a completed application to cash into the client’s account, although same-day funding occurs regularly.
Mr. Taylhardat adds that the borrowing rate is higher than a bank loan and the term is shorter, but in his experience the product worked well for him and the process was transparent.
Time of reimbursement
Determining how much a business will pay for a cash advance is based on many factors. “We took a whole bunch of app data, raw bank data, credit bureau data – and our statistic score indicates what the risk is for that account,” says Gens.
Instead of an annual percentage rate, a typical way of expressing interest on a term loan, Merchant Growth uses a factor rate on its products.
With an annual percentage rate, repayments reduce the principal on which interest is calculated. With Merchant Growth, the amount to be repaid is the original loan amount multiplied by the factor rate. Borrowing $ 100,000 at a factor rate of 1.20 over 12 months, for example, means that the business owner will pay back $ 120,000.
Mr. Gens says the Merchant Growth factor level ranges from 1.13 to 1.28 for a 12 month product. A six- or nine-month product will have a lower factor rate range and a product longer than 15 months will have a higher range. Mr. Gens says there is no additional setup fee.
The bottom line
Andrew Zakharia, a small business accountant and founder of the AZ accounting firm in Toronto, says that while Merchant Growth gives business owners quick access to capital, business owners need to know the risk and what they’re doing. ‘engage.
“Don’t use it as a lifeline for your business,” Zakharia said, adding that the high cost of borrowing means that an already cash-strapped business could face cash flow problems again. more important.
He warns borrowers need to understand how daily or weekly payments will affect their business, and says the flexible product can be even more difficult to predict because the daily or weekly repayment amount is not fixed.
“With a traditional loan, you might have three or five years to pay off, so it doesn’t really affect your cash flow. There is a long time horizon to turn your business around, ”he says. “[A merchant cash advance] Really should only be used by someone who knows 100% that in six months to a year their situation is going to change a lot.
Mr Gens says that while Merchant Growth’s products are shorter term than traditional options, they are sized appropriately based on what a business can afford. He adds that it’s important for a business to track its fundraising payments as a percentage of revenue.
“While maintaining a low percentage of payments to turnover limits the amount a business can claim with us, we don’t want to burden a business with more credit than it can comfortably repay from. cash flow, ”he says.