Mistakes, Problems and Official Sources
Merchant cash advances in Canada: factor rates, the real annual cost and safer alternatives
How a merchant cash advance works in Canada, how to turn a factor rate into an annual cost with a worked example, the contract terms to watch, and alternatives to consider first.
A merchant cash advance (MCA) gives your business a lump sum in exchange for a larger amount collected from future card sales or bank deposits, usually daily or weekly. It is priced with a factor rate, for example 1.35, which sounds small but often works out to an annual cost of 60% to well over 90% when repaid over several months. Providers usually describe MCAs as purchases of future receivables rather than loans, which they say places them outside lending rules such as the criminal interest rate. Treat an MCA as a last resort, convert its cost into an annual rate before deciding, and compare it with a line of credit, supplier terms or a government-backed loan first.
This guide is part of business loan mistakes to avoid. Figures are illustrative.
How an MCA works
- The provider advances a sum, for example $40,000.
- You agree to deliver a "purchased amount" equal to the advance times the factor rate: $40,000 x 1.35 = $54,000.
- Collection happens through a holdback, a percentage of daily card settlements or fixed debits from your bank account, until the purchased amount is collected.
- There is usually no stated interest rate and no fixed end date, only an estimated one.
Worked example: the annual cost
A Vancouver restaurant takes $40,000 at a factor rate of 1.35. The holdback is 12% of deposits, which average about $12,860 a week, so about $1,543 a week is collected.
- Purchased amount: $54,000. Cost of the advance: $14,000, or 35% of the amount received.
- At $1,543 a week the $54,000 is collected in about 35 weeks, roughly eight months.
- Treated as a loan, that cash flow implies an annual rate of about 92%.
If sales slow by a quarter, collections fall to about $1,157 a week and repayment stretches to about 47 weeks. The implied annual cost falls to about 71%, but cash is drained for longer. If the contract has a fixed daily or weekly debit instead of a true percentage of sales, there is no relief when sales fall, and the product behaves much like a short-term loan.
Compare: a $40,000 term loan at 12% over three years would cost about $1,329 a month, with about $7,830 of interest over three years, and no one taking cash from each day's sales.
Why "it's not a loan" matters
Whether an MCA is legally a loan depends on its terms. Courts in Canada and elsewhere look at substance: if the provider's repayment is effectively guaranteed regardless of sales, for example with fixed payments, a firm repayment date or full recourse whatever the business's performance, the agreement may be treated as a loan. That matters because:
- Loans to a corporation over $10,000 up to $500,000 must not exceed 48% APR, and loans of $10,000 or less or to individuals must not exceed 35% APR, under the criminal rate rules in force since 1 January 2025.
- The Interest Act section 4 limits recovery to 5% a year where interest is stated only for periods shorter than a year without a yearly equivalent.
If you have signed an MCA and its effective cost is very high, a lawyer can tell you whether these rules might apply. Do not simply stop payments, which can trigger default clauses.
Contract terms to read before signing
| Term | What to look for | Risk |
|---|---|---|
| Factor rate and fees | Origination, administration or "underwriting" fees deducted from the advance | Cost higher than the factor rate suggests |
| Holdback method | Percentage of actual sales, or fixed debits | Fixed debits do not fall with sales |
| Reconciliation | Your right to ask for an adjustment when sales drop | Without it, the "percentage of sales" is in name only |
| Personal guarantee | Guarantee of performance or of payment | Your personal assets may be at risk |
| Default triggers | Changing bank accounts, a second advance, a sale of the business, closing for a few days | Default can make the full balance due at once |
| Security | A general security interest registered under the PPSA | Can block a later bank loan |
| Early payoff | Discount for early repayment, or the full purchased amount | Often no saving for paying early |
| Stacking | Ban on, or acceptance of, other advances | Several advances at once can quickly overwhelm cash flow |
Alternatives to try first
- Ask your bank or credit union for an increase in your operating line or a short term loan.
- Supplier terms: ask key suppliers for 30 or 60 days.
- A CSBFP line of credit of up to $150,000 for working capital, through a participating lender; see the CSBFP guide.
- BDC working capital loans.
- Invoice factoring if your problem is slow-paying business customers; it can also be expensive, but usually less than an MCA. See types of financing compared.
- Cut or defer costs before adding expensive debt.
If you already have one
- Write down the remaining purchased amount and how much is collected each week.
- Do not take a second advance to pay the first.
- Ask a bank, credit union or BDC whether a term loan could pay it off; see refinancing an expensive business loan.
- If cash flow cannot cover the advance and other debts, speak to a Licensed Insolvency Trustee about a proposal; see covenant breach and default.
Use the fee calculator to see how much cash you actually receive after fees.
Frequently asked questions
Is a merchant cash advance regulated in Canada?
There is no specific federal regime for MCAs. Providers are generally not banks and are not regulated as lenders in the same way. General contract law, and lending laws if the agreement is in substance a loan, still apply.
Does an MCA affect my credit?
Many providers do not report to credit bureaus, but they may check your credit and register security under the PPSA, which other lenders will see.
Why are MCAs approved so quickly?
They rely on your sales history and daily collection rather than full financial statements. Speed is what you pay for.
Can I complain to OBSI about an MCA provider?
Only if the provider is an OBSI participating firm, which most are not. You may need legal advice or the courts.
Sources
- Justice Laws Website — Criminal Code section 347, Criminal Interest Rate Regulations, Interest Act
- Financial Consumer Agency of Canada — information on high-cost borrowing
- Innovation, Science and Economic Development Canada — CSBFP lines of credit and the Office of the Superintendent of Bankruptcy
- BDC — working capital alternatives
