Canadian business owners and financial managers can be forgiven for getting confused when they hear about a ‘ merchant cash advance ‘of future sales as a financing strategy that is recommended for both growth and business financing survival.
Part of this confusion comes simply from the fact that this relatively new business financing strategy goes under several names – those names include merchant advance, , unsecured business loan , etc. In reality they all of course are talking about the same financing strategy – which is the sale of your sales and receivables for immediate cash to another party, generally a private company ‘.
The sale , and monetizing of these future sales causes two occurrences, a profit for the finance company, (generally between 1-3%) and immediate cash for your firm, which is the seller and owner of the sales and receivables your firm has generated will generate .
. The Canadian business marketplace has been somewhat slower to accept merchant advance as a true traditional business financing strategy and loan alternative because of the optics of who collects the receivable. In years gone by it were only ‘financially troubled’ firms that utilized this strategy. That has clearly changed and business funding of various types is utilized by small start ups to some of Canada’s major corporations.
When we meet with clients who are considering a merchant advance working capital facility it is very easy to explain the immediate benefits – these of course include working capital and cash flow generation. However the type of facility you enter into, what firm you work with, and how this facility works on a day to day basis is really the essence of the key points that we focus on when a client contemplates this type of financing.
The ‘cost ‘of a merchant advance business funding loan alternative should be a key discussion point in contemplation of such a financing. Unless you are a large already very credit worthy corporation your costs will range from 1-3% per month. Factors that should take into account are the length of time that your customers take to pay yourself, and your ability to sustain the additional financing costs. There is a bottom line here, and that is simply hat you should have sufficient gross margin on your product or service that allows you to bear these additional costs. Customers think of these costs as the ‘ interest rate ‘ on the transaction – this is really not valid because merchant cash advance financing is not a debt financing per se, it is simply the liquidating of your future sales and receivables at an agreed upon discount . At the end of the day whether it’s perceived as a ‘ rate ‘ or a ‘ discount ‘ it still needs to be build into your profitability and cash flows budgets .
Is merchant cash advance financing a recommended strategy? It is if you can immediately benefit from cash flow and working capital. It makes even more sense when you can utilized those funds to take advantages of supplier discounts and improved purchasing power. We have known some customers that have gained 100% cash flow benefits by immediate sale of their receivable, while at the same time utilizing those funds to reduce almost all of their discount merchant cash advance fees. That’s true cash flow power.
Is there a bottom line? It’s simply that you should investigate this type of business funding as a loan alternative , determine which benefits might work for you – while at the same time assessing costs and how the facility will work on a day to day basis. If it makes sense at that point work with a trusted, credible and experienced advisor to implement this relatively new cash flow solution for Canadian business .