This article is part of The Globe and Mail’s Small Business Borrowing Guide series, which runs weekly on The Globe’s Entrepreneurship page until November.
When David Gens started his financing company, Merchant Growth, 10 years ago, merchant cash advances were not a well-known product in Canada.
A small business uses a merchant cash advance to receive capital now and pays it off as a percentage of future debit- and credit-card sales. Unlike a loan with a fixed term, the repayment time can vary depending on the sales of the business.
Mr. Gens, who was working in the investment industry, saw that merchant cash advances were growing in popularity 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 rebranded as Merchant Growth – has gone on to advance more than $250-million to more than 4,500 businesses.
“I’m never going to be the cheapest provider of credit, because the banks have an inherent advantage in terms of their cost of funds,” Mr. Gens says. “But I can be the most convenient source for financing for small business and that’s the vision I’ve rallied the company around.”
The promise
Merchant Growth offers small-business owners two types of merchant cash-advance products, as well as business lines of credit. One merchant cash-advance product, called Flex Solution, is repaid on a daily basis, based on a fixed percentage of each day’s debit- and credit-card sales, ranging between 4 per cent and 15 per cent.
The other merchant cash-advance product, Fixed Solution, strays from the usual cash-advance model and involves repaying a fixed daily or weekly amount, rather than a percentage of sales.
“This product allowed us to extend credit to businesses that don’t actually have built-in credit card sales,” Mr. Gens says. “Then as we started offering it, we found that some business owners just prefer knowing exactly what’s 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 about $40,000. The average term is estimated at 12 months, but for the Flex Solution, that number can vary depending on sales at the business.
For both products, businesses with minimum average monthly sales of $10,000 and a minimum of six months in business are eligible. Merchant Growth takes into account personal and business credit ratings and business bank statements.
Of the small-business owners who apply to Merchant Growth, between 65 per cent and 70 per cent are approved for funding, Mr. Gens says.
The experience
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, chief executive 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 applying to Merchant, Mr. Taylhardat says he looked into financing options through banks. But because he does not own a house, he says he had trouble securing a loan.
“If you don’t have equity, basically if they can’t take something from you, they’re not going to lend you money,” he says. “It’s very hard as a business owner to be able to borrow money.”
Merchant Growth lends money differently than banks, Mr. Taylhardat says. He filled out a simple online application and heard back quickly, receiving money within a few days.
Mr. Gens says, on average, it takes about four days from a completed application to cash in the client’s account, although same-day financing does happen regularly.
Mr. Taylhardat adds the rate to borrow 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.
Payback time
Determining how much a business will pay for an advance is based on many factors. “We’ve taken a whole bunch of application data, raw bank data, credit bureau data – and our statistical score comes up with what the risk is for that account,” Mr. Gens says.
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, the repayments reduce the principal on which the 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 the business owner will repay $120,000.
Mr. Gens says Merchant Growth’s factor rate 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 lasting more than 15 months will have a higher range. Mr. Gens says there is no additional origination fee.
The bottom line
Andrew Zakharia, a small-business accountant and founder of AZ Accounting Firm in Toronto, says while Merchant Growth provides business owners with fast access to capital, business owners need to know the risk and what they’re signing up for.
“Don’t use it as a lifeline for your business,” Mr. Zakharia says, adding that the high cost to borrow means a business already short on cash could face even larger cash-flow issues.
He cautions that borrowers need to understand how daily or weekly payments will affect their business, and says the flex product can be even more difficult to forecast because the daily or weekly repayment amount is not fixed.
“With a traditional loan, you might have three or five years to repay, so it doesn’t really affect your cash flow that much. There’s a long time horizon to turn your business around,” he says. "[A merchant cash advance] really only should be used by somebody that knows, 100 per cent, that in six months to a year, their situation is going to change a lot.”
Mr. Gens says while Merchant Growth’s products are shorter term than traditional options, they’re sized appropriately based on what a business can afford. He adds it’s important for a business to track its financing payments as a percentage of revenue.
“While keeping this payments-to-revenue percentage low limits the amount that a business qualifies for with us, we do not want to overburden a business with more credit than it is able to comfortably repay from cash flow,” he says.