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A small business loan can be a great tool to help build your business but can be detrimental if you are having a slower month. With a small merchant loan, regardless of your sales for the term, you are still required to make the payments.

Additionally, you can be stuck paying interest for years as it will continuously compound on the principal amount. This is besides the fact that over 50% of Canadian businesses simply cannot get approved by traditional lenders.

2M7 Financing: Merchant Cash Advance

  • Higher than 97% approval rate
  • Does not register on your credit file (both personal and commercial)
  • Takes 4-6 hours for approval
  • Merchant Cash Advance does not require any type of credit
  • You must be in business for 90 days
  • NO fees or interest charges (other than a one-time Cost of Capital)
  • Flexible payments (to work with your business and not hurt your cash flow)

Small Business Loans

  • Less than 50% approval rate
  • Registers to your credit score
  • Takes 4-6 weeks for approval
  • Requires good credit
  • Must be in business for at least 2 years
  • Fees + accruing interest
  • Fixed payments regardless of business performance

How to finance a small business in Canada?

In case your type of business require initial capital investment you can utilize your own savings or borrow from friends of family members.

A smarter option would be using financial tools available on Canadian market: bank loans, small business loan or in case of short cash need using online lenders. For large amounts of investment cash you would be looking into government grants (which have certain requirements to be received), crowdfunding, venture capital or “angel investors” as well as business incubators.

If you need the business funding during its operation, or for growing its assets and cash flow, look into merchant cash advance, revenue based financing or checks factoring.

What is working capital?

The term refers to the amount of money your business has available for daily or monthly operations, versus current business liabilities such as bills, salaries and stock management. The formula goes as Current Assets – Current Liabilities = Working Assets.

For example your business monthly revenue is $50000, your rent is $10000, salaries another $20000 and other operational spending is $8000. Your working capital would be $12000 – you can reinvest it into equipment, marketing or just use it as a profit.

You can find more information on working capital here.

Can a business finance a vehicle?

Yes, it can, if this vehicle is used for business needs. There are plenty available options for its financing, starting from simple bank loan for commercial leasing, and going into other funding avenues such as asset based lending, equipment leasing loans. If you are into green energy you can also look into Canadian government incentives for eco-friendly vehicles.

How do you get a business line of credit?

Line of credit could be a great help in business funding, here are the steps business owner has to undertake for getting it:

  • Assess your required credit amount
  • Plan what type of credit you want to use: revolving line of credit or a term loan. A revolving line of credit allows you to borrow, repay, and re-borrow funds up to a set credit limit. A term loan provides a lump sum upfront, which you repay over a specified period.
  • Prepare your business documentation to be ready for application – including financial statements, CRA balances and credit history.
  • Choose your business credit line sources – bank, private lenders or unions. Depending on the source you might be requested to undergo credit check.
  • Submit your application (or applications)

How to get funding for your business?

Depends on your business growth stage and credit history you have multiple available sources for funding:

  • Bootstrapping (your own savings and business generated revenue)
  • Bank loans – Government grants and interest free loans
  • Angel investors, shareholders and potential business partners
  • Credit union business loans
  • Revenue based financing such as merchant cash advances or checks factoring

How does accounts receivable factoring work?

Accounts receivable factoring, or “factoring”, is a funding option, in which a business “pre-sells” its accounts receivable (unpaid invoices or post-dated cheques) to a third-party company (factor). This gives the business an opportunity to use its future funds earlier and receive cash in exchange for a percentage of the future payment

What is revenue based financing?

Revenue-based financing, or “RBF”, also known as “revenue-based loans” or “revenue-based capital”, is a business financing type in which a company receives capital from a lender in exchange for a percentage of its future revenue. This source of financing is popular among start-ups and small businesses that require initial capitals to build their assets in order to start generating consistent revenue.

In this model entrepreneur doesn’t have to pay interest or set monthly fee but to repay investor based on ongoing business revenue, or in other words, sharing its cash flow profits with RBF lender.

How to get a small business loan

There are few typical steps an entrepreneur has to undertake to get a business loan:

  • Determine the specific financial need and the purpose of the borrowing
  • Ensure your personal and business credit history profiles are clear; if required close pending payments and improve your credit score.
  • Identify the type of loan that suits your business needs and abilities (based on the previous credit score). Common options in Canada include term loans, lines of credit, equipment financing, government-backed loans or private lenders. Each type of loan serves different purposes, differs in possible amount for borrowing, and has specific eligibility criteria.
  • Gather all required documents, such as business registration / incorporation, tax returns, bank statements, and other required files.
  • Submit your application for the chosen lender
  • After you got approved, review the offer terms, you may compare and even negotiate better conditions and interest rates
  • Accept the offer and get funds.

What is poor business credit score?

In Canada, business credit scores typically range from 0 to 100. The higher business scores, the more opportunities its have with traditional money borrowing.

In general, a business credit score below 60 is often considered poor and high-risk for many financing options.

You can learn more about getting a funding with low credit score here.

What is the minimum credit score for a business loan?

In Canada there is no specific minimum credit score required for business to apply or obtain a loan. A-lenders or B-lenders have their own risk assessment levels which vary between type of lender and industry of borrower.

  • In general lenders will check a few aspects of borrowing business:
  • Business credit history
  • Business-owner personal credit score
  • Financial health of the business (statements, balance sheets etc.)
  • Business owned assets
  • Business industry risks
  • In some cases lender can request the borrower to submit a business plan, to have better idea how invested funds would be used

Do business loans show up on personal credit?

In Canada, business loans generally aren’t connected to a personal credit reports, with two exclusions:

  • Business Loan with a Personal Guarantee
  • Personal Co-Signing, for example sole-proprietorship business

Does merchant cash advance require high credit score?

Merchant cash advance (MCA) does not require a high credit score, at least not as a primary qualification factor. Merchant cash advance approval is primarily based on a business’s daily cash-flow or monthly revenue, rather than the personal credit score of the business or business owner.

What is the difference between a loan and a merchant cash advance (MCA)?

Repayment Structure:

Loans have fixed repayment schedules. Borrower makes predetermined payments on regular basis of monthly, bi-weekly or other periods. MCA repayments having more flexibility – instead of fixed monthly payments, a percentage of the business’s daily credit card sales is deducted until the advance is paid off.

Cost of borrowing:

Loans have an annual interest rate (APR) that represents the cost. The borrower pays interest on the principal amount over the loan term. Instead of traditional interest rate MCA lender rather charges a factor rate. The factor rate represents the total amount borrowing cost, and it is typically higher than a traditional loan’s interest rate. The total repayment amount remains fixed, regardless of how quickly the advance is paid off.

Availability and Credit Check:

Traditional loans may require borrower to undergo a credit check to assess his or her creditworthiness. MCAs are usually unsecured, meaning they don’t require collateral. Instead, MCA providers focus on the business’s daily credit card sales and future revenue potential rather than the business owner’s credit history.

Regulations:

Loan are subject to strict financial regulations and lending laws in Canada, which may vary by province. MCA has less stringent regulations, this allow for borrower to obtain the funds faster.

How does merchant cash advance work

A Merchant Cash Advance (MCA) is a financing option for businesses that need quick access to cash. Unlike traditional loans, MCAs involve a cash advance provided to a business in exchange for a percentage of its future credit card sales or daily revenue.

MCA is commonly used by businesses that have consistent daily credit card sales and can offer a percentage of it as per future repayment for quick cash. Some industries may greatly benefit from MCA, based on their daily operations:

  • Restaurants & hospitality
  • Retail, e-commerce and online retail
  • Auto service & transportation
  • Seasonal businesses
  • Healthcare providers, salons and spas
  • Entertainment and events

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