In the US, the merchant cash advance industry has been around for around 12 years or so, and has seen rapid development particularly in the last 6 or 7 years. As a result, today there are a number of providers that offer different innovative services and that target different levels of risk within their portfolios. There are starter advances for new companies, there are funding providers that specialize in certain industries, and there’s a variety of underwriting strategies and prices. There are even brokers that connect business owners with the merchant cash advance provider that would most suit their needs (although these often come with a fee!).
What defines a Merchant Cash Advance?
In Canada, the industry is much newer, perhaps only 4 years old. Our market is not nearly as developed and we want to provide a different service from the rest. However, Canada will probably always be somewhat behind compared to the states just because the opportunity set is so much larger in the states (the US has an economy and population that is roughly 10 times larger), so there is not as much room for different services. But we feel that some differentiation is warranted and needed in Canada. Our competition is focussed on providing advances to almost anyone rejected by banks (ie taking a lot of risk overall) and charging a lot for their services to compensate for the losses that result from this sort of strategy. We want to take a different approach – we want to lower our overall risk and charge less for our services by targeting people with good businesses that need capital to grow. This might mean that our approval rates for new clients will be a bit lower than our competition, but it ensures we work with the right people and offer them a reasonably priced service.
Granted, a merchant cash advance will always be more expensive than bank debt if you just look at the implied interest rate in both cases. But this is justifiably so. A merchant cash advance does not require collateral, has less paperwork, and most importantly, does not have a fixed repayment schedule giving our clients fantastic cash flow flexibility. Our inability to perfectly forecast when we get paid back and our lower security position requires us to price the service accordingly. But we believe our strategy will allow us to offer flexible unsecured financing for small businesses, a service typically only available to larger companies, and we can make it available at a good price because we are targeting good people that are looking to grow their business!