Funding for Businesses with Bad Credit History

Today’s small businesses don’t need to rely on big banks for financing options. Over the past decade, there has been a rise in alternative MCA Industry that make it easier and faster for startups and small businesses to find the cash they need when they need it.When business owners consider applying for a merchant cash advance (MCA), it is usually because they are in need of cash flow immediately, have poor credit, or haven’t had success with traditional loan applications. MCAs give business owners flexibility as funds can come through to their bank accounts within days and the transaction requires no personal guarantee. This is because MCAs are not considered loans, so there is no need to put up collateral to receive an advance.Merchant cash providers are strictly offering an immediate cash infusion for a portion of a business’s future earnings through repayment plans or a percentage of upcoming credit card transactions. As credit card use has expanded, this type of lending has become increasingly popular with businesses whose sales often come via card, not cash.As the MCA industry continues to grow, what will the future of MCA lending look like?

Collaboration with Commercial Banks

The success and growth of the merchant cash advance industry have led commercial banks to reevaluate their lending requirements to become more competitive with MCA providers. While banks must maintain strict lending standards, they may begin to partner or collaborate with MCA industry leaders like investors, advisors, or partners.Commercial banks are noticing the simplicity and necessity of offering small businesses quick and easy financing but may not be able to provide it themselves. By working with an MCA provider, they can give their clients additional options that have been vetted by the bank.

Changes in Oversight

One of the main differences between merchant cash advances and other more traditional forms of funding is that MCAs are exempt from state and federal oversight. This means MCA providers with poor reputations can go unchecked and there are no set standards in place for interest rates or procedural best practices.With the recent boom of the MCA industry, it may be necessary for an increase in oversight to help clamp down on lenders who are mistreating clients or to set standards for this growing sector. This would help protect small businesses, as well as lend credibility to those MCA providers that are doing the best work for their clients.

Additional Offerings

Some MCA providers are beginning to diversify their offerings to compete with new financing options offered by prominent names like PayPal and Square. This means some MCA providers may consider offering more traditional loans, lines of credit, and cheaper rates than their larger competitors.In addition, since small businesses are beginning to have more and more confidence in the MCA process, the interest of venture capitalists and other investors has grown. This might mean the creation of new technology and credit score models that may disrupt how financing has previously been regulated.

What is a business line of credit?

A business line of credit (LOC) is designed to meet the short-term financing needs of businesses. Basically, it is a revolving sum of money lent to a business owner. The borrower pays interest on the borrowed amount while the interest rate may be at a fixed or variable rate, depending on the borrower’s financial state. LOC is a type of debt financing, which is offered by traditional financial institutions in Canada. A business line of credit is often referred to as a “corporate line of credit”. As a debt instrument, they are both the same.LOC is very much like a credit card for your business. The business owner will be given a pre-approved credit amount from which he can draw capital as needed. Once the funds are used, the borrower will need to repay the amount including the interest over the repayment term as agreed. A business line of credit is one of the many options to fund your business or to get funds for a new business. It gives access to affordable credit if the borrower qualifies. The LOC provides ready cash flow, that could help solve the liquidity problems that small businesses tend to suffer the most.

What is a small business line of credit?

Lending providers offer a small business line of credits to small-sized businesses with different combinations of rates and qualifications. These may include the following:  

• An unsecured line of credit (up to $50,000)
• Secured credit (up to $1,250,000)
• Floating interest rates
• Business insurance
• Shorter approval/processing times
• Low monthly fees

A small line of credit under $300,000 can be approved online. For small business owners, a line of credit is one of the easiest ways to secure cash flow for their business operations. The application for a small business line of credit is typically short, and approval can be granted within one business day.

How to get a line of credit for your business?

Banks in Canada have a variety of LOC products for small and mid-sized businesses. You should consider applying for a business line of credit at a bank you’re already registered to. Make sure to apply for a line of credit ahead of time as, unlike loans, it can take up to a month to get approved. In order to apply for a line of credit, you should open a business bank account. Below is a list of documents that you would need to provide for your LOC application:

• Two pieces of government-issued IDs
• Proof of income
• Business financial statements, including income, expenses, assets, and liabilities
• Other personal- and business-specific information such as an address, license number (if applicable), and how long you’ve been in business

How to get approved for a business line of credit?

Whether or not your line of credit is approved depends on your credit score and your business qualifications. The higher your credit score and the more stable your business income, the more likely it is that you will be approved for a line of credit, and the larger it will be. It is very important to have a good credit score and to keep your business financial documents in order. If a bank is unable to adequately assess your business potential, it will lower the chance of receiving a line of credit. With a private lender, things are a bit easier as the lender may adopt different criteria and qualifications to advance the line of credit. Also, private lenders are more open to lending to businesses with lower credit scores. Remember, when looking for a small business loan line of credit, make sure to evaluate several options. The majority of small businesses prefer to choose private lenders as they are able to receive more flexible offers. Check out how merchant cash advance works to see if your business qualifies.

Why is a business line of credit better than a loan?

A business loan is typically obtained and disbursed only for a specific purpose. It is meant to provide access to capital for a one-time, major financial expenditure. Therefore, to manage your operating cash flow, you will have to apply for multiple business loans – each of which will negatively affect your credit score.However, a business line of credit allows you to improve your credit score. You only borrow the money you need and pay interest based on that amount. A business LOC allows for greater financial planning and resolves cash flow problems that small businesses often experience.

Why you may be denied a line of credit?

There are a number of reasons why you may be denied a business LOC. Most likely, your bad credit score will lead to a refusal, but that is not the only reason. The line of credit may be refused for a number of reasons, including:

• Purpose of LOC does not meet the required criteria
• Your industry is too risky
• The commercial bureau reports negative performance
• Business revenues indicate insufficient ability to handle monthly payments

Having a low credit score doesn't mean you can't take any type of loan. Check out some ways to get a business loan with a bad credit score.

Approaching a private lender for a small line of credit

If you require a moderate-sized line of credit, it is worth approaching a private lender. A small lender will not require as many documents as the bank, and the approval process will be faster as well. Also, private lenders accept applications for LOCs online and you can get request a quote online. Private lenders will help you understand why your line of credit has been denied by the bank and can provide the necessary funding in a shorter time with less hassle and stress and treated as bad credit debt help. If you are interested in an alternative solution made for small businesses, talk to one of our experts today for the best business cash advance loans.

· By Avi Bernstein, CEO, 2M7 Financial Solutions

Merchant cash advances aren't priced like bank financing, so their cost can be hard to compare. There's no annual interest rate. Instead, the funder applies a factor rate to the amount you receive to calculate the total repayment, and that total is set before you sign. The cost of capital is the total repayment minus the advance.

2M7 Financial Solutions is a Canadian direct funder of merchant cash advances. At 2M7, the cost of an advance is a fixed dollar amount agreed before you sign. Multiplying the advance by the factor rate gives the agreed total repayment, before any eligible early payoff discount. Factor rates at 2M7 typically fall between 1.18 and 1.48, so a $50,000 advance has an agreed total repayment between $59,000 and $74,000 and a cost of capital between $9,000 and $24,000.

The agreed cost does not grow while the advance is outstanding, and no interest accrues. The factor rate you're offered depends on the funding amount, how long the business has operated, its monthly revenue and its industry.

The repayment option you choose affects your daily cash flow, and an eligible early payoff can reduce the total cost. Both are covered below, with worked examples for a restaurant, a construction company and a retailer. All dollar amounts are in Canadian dollars.

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How do you calculate merchant cash advance costs?

Start with the amount you receive, the total you will repay and the payment coming out of your account. A factor rate is the multiplier used to calculate total repayment. Subtract the advance from that total to get the cost of capital.

Agreed total repayment = Advance × Factor rate

Cost of capital = Agreed total repayment − Advance

With fixed payments, the same amount is paid automatically each business day, and you can call 2M7 to ask about reducing it if revenue drops. Your offer states the payment amount.

With flex payments, the payment is a share of the revenue deposited into your business account each day.

Flex daily payment = Daily revenue × Holdback percentage

The holdback percentage at 2M7 typically ranges from 4% to 30%, depending on the funding amount, revenue and industry. The percentage stays the same and the dollar amount moves with your daily revenue.

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What a $50,000 advance costs

On a $50,000 advance, a factor rate of 1.18 means $9,000 in cost of capital. At 1.48, that cost is $24,000.

Agreed totals are before any eligible early payoff discount. Your offer shows the exact factor rate and agreed total repayment in dollars before you accept it.

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Three worked examples

Illustrative examples, not offers. Factor rates and holdback percentages are within 2M7's published ranges, and agreed totals are before any eligible early payoff discount.

Restaurant. The owner replaces a range and a walk-in cooler. On a day with $3,000 in revenue, $300 goes to repayment. If a slow week drops revenue to $2,000 a day, the payment drops to $200 and repayment takes longer. Changes in sales do not change the agreed $65,000 total. An eligible early payoff can reduce it.

Construction company. A contractor has to buy materials weeks before the client's first progress payment. Revenue arrives in large, irregular deposits rather than steady daily income. This illustration uses fixed payments: the contractor pays the same amount automatically each business day and can call 2M7 to ask about reducing it if a client payment arrives late.

Retailer. A store stocks up in October for the holiday season. In December, daily revenue climbs to $5,000 and the payment rises to $400, so the advance is repaid faster during the busiest weeks. In a quiet January, the payment falls with revenue.

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Fixed or flex payments: the same advance two ways

Here is the restaurant's $50,000 advance at 1.30 under each option. For this illustration, both options use the same factor rate and the same agreed total repayment of $65,000, before any eligible early payoff discount.

With fixed payments, the daily amount is the same each business day, which some owners find easier to plan around. With flex payments, the dollar payment decreases when daily revenue falls and increases when it rises.

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Does paying early save money?

At 2M7, an eligible early payoff receives a 10% discount on the remaining balance when the account is in good standing and the payment comes directly from your business, not from another funder. Not every funder offers an early payoff discount, so when you compare offers, ask whether paying early changes the amount owed.

Take the restaurant again. It has repaid $40,000 of its $65,000 agreed total, leaving $25,000. An eligible early payoff earns $2,500 off, so the owner pays $22,500 instead. The advance's total cost drops from $15,000 to $12,500.

Ask your funding specialist for the payoff amount and the saving at your current balance.

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Factor rate vs APR

A factor rate is not an interest rate. It tells you the total repayment relative to the advance. It does not, by itself, tell you the annualized cost, which also depends on the timing and amounts of payments.

The same factor rate can represent different annualized costs depending on how quickly the advance is repaid, even when the dollar cost stays the same. With flex payments, repayment speed follows your sales.

When you compare offers, compare the agreed total repayment, the effect on daily cash flow and any savings available for an eligible early payoff. Ask for those figures in writing before you accept an offer.

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Does 2M7 charge fees beyond the factor rate?

Beyond the cost of capital, 2M7 charges no application, origination, underwriting, documentation, brokerage, servicing, maintenance, renewal or early repayment fees, and no collateral is required. 2M7 does charge a fee when a scheduled payment is returned.

Not every funder prices this way. When you compare offers, check the amount you will actually receive, the agreed total repayment and any separately stated charges.

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Frequently asked questions

What is a factor rate?

A factor rate is the multiplier used to calculate the total repayment of a merchant cash advance. Subtract the advance from that total to get the cost of capital. At 2M7, factor rates typically range from 1.18 to 1.48.

What is a holdback percentage?

With flex payments, the holdback is the share of the revenue deposited into your business account each day that goes toward repayment. At 2M7 it typically ranges from 4% to 30%. A 10% holdback on $3,000 in daily revenue is a $300 payment.

How much will I pay back on a $50,000 merchant cash advance?

At 2M7's typical factor rates, the agreed total repayment is between $59,000 and $74,000, before any eligible early payoff discount. Your offer states the exact total before you accept it.

Does a merchant cash advance cost more than a bank loan?

Usually, yes, for a business that qualifies for a bank loan. A merchant cash advance trades a higher cost for speed, repayment that can follow your sales, and an approval that weighs revenue alongside credit. Bank financing often takes longer and asks for more documentation. At 2M7, the cost is a fixed dollar amount agreed before you sign, no interest is charged and no collateral is required.

What are 2M7's minimum eligibility requirements?

2M7's minimum eligibility requirements are a Canadian business operating for at least 3 months, at least $15,000 a month in revenue and no open bankruptcies. Credit score is considered alongside revenue, so a low score does not automatically rule a business out. Meeting the minimums does not guarantee approval.

How quickly does the money arrive?

Approval decisions typically come within 1 business day, and funds are typically deposited within 24 hours of approval.

See what your advance would cost

Ask a 2M7 funding specialist for your factor rate, agreed total repayment, daily payment or holdback percentage, and early payoff conditions in writing before you accept an offer.

Check If I Qualify