Things To Watch Out For In Today’s Merchant Advance Industry – A Note From Our CEO
The Canadian merchant advance industry is now 7 years old. It has become a useful source of cash for thousands of small businesses across Canada. Banks continue to remain stringent with small business lending and instead rely on retail banking (personal mortgages, lines of credit, credit cards, service fees etc.) for their revenue, as well as on larger transactions through their commercial banking and wholesale banking divisions. Clearly the merchant advance industry has assisted Canadian businesses in a meaningful way and it continues to gain traction as an alternative funding source.
But What About the Negatives?
Nothing in the world is black and white. While a new alternative funding source to small businesses is no doubt a step in the right direction, there are some things to be cautious about in this new unregulated landscape. New financial products provide financial services companies with new ways of making money, some of which are abused.
For me, my business reputation is everything, whether it is with my investors, my clients, my staff, my suppliers, or anyone else that I might deal with. I also love this business, because I truly and passionately believe we are filling a void and helping Canadian businesses. As a result it is frustrating for me when I see others in my industry act in a way that may throw my entire industry’s reputation into question. I have decided to write this post to bring to light some of the key issues one must evaluate when considering alternative business financing.
What To Watch Out For!
1) What is the company’s policy regarding “re-advances” or “top-ups”?
This is very important to understand from the perspective of the small business owner, because you should align yourself with a company that can be there for you in the long-run when you need them, and on reasonable terms. Some companies in our industry use the re-advance as a way to juice their profits.
Here is how. When you re-advance or top-up, you end up refinancing your existing remaining balance. In other words, you pay for the money twice. Make sure you are only paying a fee on the new money being advanced to you.
2) Beware of automatic re-advances or top-ups.
As much as getting financing can be a very beneficial thing for your business, it is only beneficial if you are getting it when you see an opportunity and you are in control. Some companies automatically provide you with extra funds once you have repaid some of your advance, and this is buried in the fine print of your agreement.
Furthermore, these automatic re-advances are often done at a higher % cost than your initial advance. Through these automatic re-advances you end up owing more and more instead of quickly and effectively repaying your advance through your sales.
3) Beware of systems that delay the receipt of your sales.
As a small business, your daily cash flow is very important to you. After that busy weekend you need to restock your inventory, and if you have to wait a few extra days to actually get the cash from those weekend sales (which would allow you to effectively restock), that can be very frustrating and it could actually harm your business and hurt your sales.
Some companies require you to open a third-party “lock-box” or “escrow” account where your sales go first, and you only get your portion of those sales a few days later.
Other companies may offer “split settlement”, where the credit card processing company will split the sales (based on the withholding % of your advance) and you get your portion directly from the credit card company. At the surface, it seems like this would solve the problem – but it does not! The additional administration that goes into splitting the funds also results in a delay of up to a few days.
And the worst part of it is, we have seen our competitors lie about this fact to merchants and tell them there will not be a delay, and the business owner only finds out after they have been funded at which point it is too late. This is unacceptable.
In conclusion, it is important to:
1) Make sure you are dealing with a reputable company. I am a bit biased here, but giving us a call at Merchant Advance Capital would be a great start. We are accredited by the Better Business Bureau which means we have passed their stringent criteria and we don’t have any unresolved complaints against our company.
2) Ask a lot of questions! Ask what the re-advance policy is, ask if there is a delay in receiving your funds (there is no such delay when you work with us), ask for a different set of numbers if you have any concerns (perhaps you would prefer a lower withholding, or a larger amount up-front etc.) – ask ask ask!
I am thrilled to be a part of this new and growing financial service in Canada. At Merchant Advance Capital we look forward to having many open & honest conversations and answering all of your questions. We want to build strong long-term partnerships and help many Canadian small businesses grow. We look forward to working with you!
President & CEO – Merchant Advance Capital
Call Us for more info – (604) 757-4602 [feather_follow]