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Business Capital Advance

Running businesses in Canada sometimes goes beyond the founder’s initial plans and might require a working or business capital advance. If you’re unfamiliar with this term, you’d think it’s like a business loan. However, working capital advances differ significantly from regular business loans and have many benefits.

A business capital advance is a future cash advance given to a trader based on their future income. This cash advance is provided by financial institutions against a company’s potential future credit card sales. There are a few prerequisites for this cash advance, which are provided by numerous businesses, including Growth Street Capital and Sharpshooter finance.

This article will provide much-needed information on the usefulness of this type of advance. It also explores the requirements, steps, and places to obtain one.

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How Does a Business Capital Advance Work?

Also known as a merchant cash advance, a business capital advance is a cash advance agreement made between the business owner and the lender. This agreement would stipulate the holdback, cash advance, complete payback, etc. After all these terms are finalized, the lender will transfer the agreed funds to the business.

The business has to pay back some percentage of daily or weekly credit sales (known as holdback). This continues until the day that the lent money is paid back in full.

These cash advances usually last 3 to 12 months on average. That’s enough time for an average business to get a decent profit turnover and repay the advance. Most times, merchants provide these lenders with access to their financial accounts. While this is somewhat invasive, it eliminates the need for collateral. So, your business must deal with credit cards if you’re taking a capital advance since that is the medium of repayment for this type of cash advance.

Top Business Capital Advance Partners in CanadaGet a Rate
ClearcoClick here >>
Forward FundingClick here >>
Growth Street CapitalClick here >>
Kingsmen Capital InvestmentsClick here >>
Merchant GrowthClick here >>
Smarter LoansClick here >>

What Are the Differences Between a Business Capital Advance and a Business Capital Loan?

Although they’re both cash advances, there are many differences between business capital advances and business capital loans. These differences are why many business owners settle for one another. Below are the many differences between a business cash advance and a business capital loan.

Repayment Period

The first major difference between these two cash advances is their repayment terms. Unlike business capital loans, which are mostly paid monthly, cash advances are more flexible.

Canadian business owners repay capital advances as they make profits. This could be daily, weekly, or monthly.

Repayment Interest

Taking a business capital loan means being content with the lender’s Annual Percentage Rate (APR). The APR for a loan is only concerned with the amount you borrowed. It has nothing to do with what your business earns daily, weekly, or monthly.

On the other hand, a working capital advance comes with an interest that’s a percentage of the company’s revenue. Simply put, you pay back a merchant cash advance based on how much your business earns. This is a world of difference compared to business capital loans, making many business traders favour these advances.

Generally, business capital loans require less interest from a business. The interest a business owner pays back for their capital advance is much higher.

Credit Score Requirements

All loans require the borrower to attain a minimum credit score to make them eligible for the loan. Business capital loans and business capital advances are no different. While business capital loans require a minimum credit score of 620, capital advances are lax at 500.

Loan Duration

Business cash advances rarely go beyond a year, which makes them short-term loans. Conversely, lenders offer business capital loans for months or even years at a time. This makes them suitable for either short-term or long-term loans.

Cash Advance Amount

Another main difference between these two cash advances is the amount business owners receive. Business capital loans can go up to $350,000 at a time. Business cash advances can go up to $500,000 at a time.

Of course, the above are all rough estimates since some lenders may give higher than that. Nevertheless, working capital advances are usually higher than business capital loans.

Pros of Business Capital Advance

Business capital advance offers many advantages that make many Canadian business owners prefer them over capital loans. Some of the advantages offered by this cash advance scheme include:

Capital Advances Are Easier to Secure

This cash advance scheme is less strict on its credit score requirements, allowing many business owners to obtain one. Unlike regular loans that require a credit score of 620, just 500 would do for working capital advances.

The business period requirement for these advances is also lower. A typical loan requires the business owner to have been in business for a while. The profits the business owner has made would demonstrate their ability to pay back.

On the other hand, capital advances are okay even when the business owner hasn’t been in business for long. These lax requirements make obtaining this type of advance easy for business owners.

Most Holdbacks Are Dependent on Your Daily Sales

Regular loans require you to pay back specific amounts regardless of your business situation. Working capital advances consider your business situation, so payments depend on your sales.

No Need for Much Paperwork

Regular loans require lots of paperwork before the lender approves a loan for a business. This requirement is very lax for business capital advances, as they don’t need many documents to approve their loans. Although the lenders might request a record of credit sales from about 3 months back, that’s nothing compared to regular loans.

No Collateral

One of the reasons for which many businesses get turned down is that they don’t have collateral to match their loan. This makes it difficult for commercial banks and many other lending associations to approve their loans.

Conversely, working capital advances don’t require collateral to get approved. So, even when a business doesn’t have a lot of grounded assets, it can still get a cash advance.

Easy Repayment

This is a characteristic that business capital advances share with business capital loans. These cash advances are easy to repay. And repayments can occur at the business owner’s convenience.

Most of these capital advances get paid using the Automated Clearing House (ACH) system. Business owners don’t wait a month to repay their debts, as repayment can be daily or weekly.

It’s Approved Speedily

Most business capital loans take days and sometimes weeks before that application gets approved. So, business owners in urgent need of cash cannot depend on regular business loans.

Merchant cash advances, on the other hand, are quickly approved after a customer makes an application. You don’t have to go through rounds of interviews or submit all your business documents to obtain one. This type of cash advance is perfect for when you need a short-term loan to get you out of a tight spot.

Credit Limits Aren’t Affected

The good thing about going for a capital advance is that normal credit channels are still open if it’s not enough. Taking a capital advance never harms your chances of getting a good business loan elsewhere.

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Cons of Business Capital Advances

Although an advance like this offers benefits that aren’t found in regular loans, they also come with drawbacks. Some of the drawbacks that Canadian business owners can expect, include:

High-Interest Rates

While these advances are easy to acquire, even for small businesses, their interests are high. Lenders, in this case, require the business to pay back the loan amount with at least a 25% interest. Sometimes, the interest could be higher than that and even go beyond 100%.

This is a lot of interest for a cash advance, especially considering it’s a short-term loan. Paying back such interest could strain the daily workings of a business. Therefore, a working capital advance is usually considered a last resort for urgent financial needs.

Severe Penalties

it’s customary to penalize a business when they default in paying back their owed loans. However, these penalties are severe for business capital advances, as the business owner would pay back a lot.

They Are Not Loans

One of the advantages of taking a loan (and paying it back on time) is that it builds up your credit score. This makes it easier for the business to get approved for loans and to accept higher loans. It also provides an edge in all business areas requiring a high credit score.

Unfortunately, financial institutions don’t classify these types of advances as loans. Therefore, they can’t build your credit score regardless of how much you collect.

Absence of Early Payment Bonuses

Capital advances don’t offer any discounts when you pay early. They don’t reduce your interest if you want to pay up the advance early.

They Are Short-Term Loans

Sometimes business owners might require more than the allotted 24 months or 12 months to pay back a cash advance. However, a business capital advance makes that impossible as you must pay the lent amounts within two years.

Lenders Prohibit Credit Card Processor Switching

Working capital advances get paid as a percentage of a business’s credit card sales. So, the credit card of that business gets registered with the lender. This makes it impossible for the business to switch credit card processors, even when there are issues with the current one.

Businesses That Mostly Deal with Cash Are Disadvantaged

A merchant cash advance gets paid through the credit card sales of a business. As such, the businesses that accept such advances need to engage in many credit card-related business deals. This would allow them to meet the lender’s daily or weekly holdback amount.

Failure to meet the holdback amount results in a payment penalty or even legal action.

Requirements for a Business Capital Advance

If you’ve decided that this type of advance is the best choice, you must fulfill a few requirements. These requirements are criteria that’ll qualify you for the capital advance.

  • Your company needs to have been in business for at least 6 months.
  • The headquarters of your company is in Canada.
  • A minimum amount for credit and debit card sales. This minimum amount is never fixed and is always dependent on the lender.
  • Sometimes the lenders might require the company to have physical premises and not just an online presence.
  • The merchant must provide essential documentation such as merchant ID number, business information, government ID, etc.
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Guide to Applying for a Business Capital Advance

Many business owners are unaware of the correct format for applying for a merchant cash advance. This makes many capital advance lenders take advantage of them. Below is a guide that you can follow if you’re considering one:

Consider Your Financial Situation

This is the first thing a business owner should check before considering a capital advance. How big is their profit margin? Can the business afford to be paying a particular percentage even with their limited profit?

Do Your Research

There are lots of lenders out there that offer capital advance services. The terms of these lenders are different, and so are their holdbacks. Some make the business owner pay an interest of 25%, while others charge interest higher than 100%.

These are factors that business owners should look at before they finally decide on a lender.

Request for the Calculated Annual Percentage Rate (APR)

These advances can be somewhat deceptive when considering that you’re paying them back daily. This blinds many merchants to what they eventually pay back in total. Request a calculated annual percentage rate to ensure what you’d be in for.

Where to Get a Business Capital Advance

While they are a type of business funding, capital advances are not classified as loans. As such, they’re not bound by federal regulations, making many merchants fall into the hands of loan sharks. Hence, you’ll need trustworthy sources to acquire this type of advance, and some of them are listed below:

Growth Street Capital

Growth Street Capital is an alternative lender that caters to the financial needs of Canadian businesses. It offers various financial services, including capital advances to businesses.

Pros of Growth Street Capital

  • Fast funding and approval process
  • Businesses with low credit scores are also approved
  • Straightforward application process
  • No limitations on the usage of the acquired funds
  • This company has a high approval rate for businesses

Cons of Growth Street Capital

  • Growth Street Capital is still a newly established company; as such, they offer limited financing options.

Kingsmen Capital Investments

Kingsmen Capital Investments is a Canadian business known for providing easy access to business funding. This company offers lots of financial options that are favourable to medium-sized businesses.

Pros of Kingsmen Capital Investments

  • Business funding approvals occur in less than 24 hours
  • Personalized advances are available
  • Exemplary customer support

Cons of Kingsmen Capital Investments

  • Merchants may encounter high-interest rates

Sharpshooter Funding

Sharpshooter Funding mainly caters to the needs of start-ups, providing them with the funds they need to grow. As such, they’re one of the best options for businesses that require a rapid cash advance.

Pros of Sharpshooter Funding

  • Same-day approval for most business funds
  • Their approval of funds depends on the business’s health and not on credit scores.
  • Easy application process
  • Decent interest rates for their business capital advance

Cons of Sharpshooter Funding

  • Their interest rates are higher for those with bad credit.

Business Capital Advance Conclusion

A business capital advance is a good business funding option for merchants that require quick cash. The requirements for this funding are lax as they also accept businesses with low credit scores.

This type of advance offers many benefits, such as an easy application process and repayment methods. Nevertheless, its interest rates are higher than regular loans, and the repayment period is shorter. This cash advance is a good option for new businesses, businesses with bad credit, and merchants that need quick cash.

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Offers shown here are from third-party advertisers. We are not an agent, representative, or broker of any advertiser, and we don’t endorse or recommend any particular offer. Information is provided by the advertiser and is shown without any representation or warranty from us as to its accuracy or applicability. Each offer is subject to the advertiser’s review, approval, and terms. We receive compensation from companies whose offers are shown here, and that may impact how and where offers appear (and in what order). We don’t include all products or offers out there, but we hope what you see will give you some great options.

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September 21, 2022
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FAQs about Business Capital Advance

When Do I Need to Pay Back My Business Capital Advance?

The repayment period for this type of advance is never fixed. It’s dependent on the lender.

Do I Need Collateral for a Business Capital Advance?

No, collateral is not a requirement for a working capital advance.

What’s the Average Holdback Range for Most Lenders?

The average holdback percentage for most lenders is between 8% to 30%.

Is There a Grace Period before Interest Starts to Count?

There is no grace period for business capital advances. So, interest starts counting from the day the merchant receives the cash advance.

How Much Can I Get from a Business Capital Advance?

Merchants can expect a range from $5000 to $400,000 as a cash advance.

Is a Business Capital Advance Legal?

These advances are future purchases of credit. Hence, they are legal under Canadian commercial code.

Can My New Business Get a Business Capital Advance?

Business/working capital advances are one of the most popular funding methods for start-ups that are denied regular loans.

Can My Online Business Get a Business Capital Advance?

Online businesses deal with credit card sales. As such, they’re eligible for this type of advance.

Will My Bad Credit Affect My Approval Chances?

Bad credit will not affect a merchant's chances of obtaining capital advance funding as lenders do not consider it.

Does Bad Credit Have Any Effects on a Business Capital Advance?

While bad credit will not deny you a business/working capital advance, it will restrict you from getting good terms. Some lenders will give you a cash advance when you have bad credit, but it’ll come with high-interest rates.

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