Credit Card Receivables Financing

If your business accepts credit cards and has a steady revenue stream, you have a good idea of your future short-term revenue. However, sometimes a business has an urgent need for cash and can’t wait for the credit card receipts to hit the bank. In this case, you might consider credit card receivables financing.

Let’s explore credit card receivables financing, how it works, and what you need to know. 

What is credit card receivables financing?

Credit card receivables financing, also known as credit card factoring or a merchant cash advance, is a viable source of short-term financing for small businesses that can’t get traditional bank loans. 

Unlike traditional lenders, credit card receivables financing companies – which may include your credit card payment processor – consider your business’s future credit card sales an asset, so they advance capital based on your projected future credit card sales. 

How does credit card receivables financing work? 

Credit card receivables financing services provide cash advances that small business owners can use to expand operations, fund marketing efforts, or put toward other business needs. These companies lend money to your business and get paid back from your future credit card sales. You pay back the amount you borrowed plus an agreed-upon percentage deducted from your credit card sales revenue. You can pay the credit card receivables company directly, or it may direct its payment processor to make the payment on its behalf.

For example, let’s say a retail store is fairly new and needs to buy a large stock of inventory to get ready for the holiday shopping season. While it has ongoing credit card revenue, it does not have enough in the bank to purchase the $20,000 in inventory it needs. 

A credit card receivables company lends the retailer the $20,000 and tacks on a fee between $2,000 and $10,000. The retailer uses the money to buy the inventory. Each month, 15% of the store’s credit card revenue goes to the credit card receivables company until the $20,000 and fees are paid in full.

Who can get approved for credit card receivables financing? 

Credit card receivables financing services consider a business’s credit card sales to determine its monthly credit card revenue. They also look at the business owner’s credit score and a few other factors: 

• Time in business (at least one year preferred)
• Ability to provide merchant processing statements with at least $4,000 per month in revenue for the last six months
• Absence of open tax liens, judgments or bankruptcies
• Acceptable business and personal credit
• Whether the business is in good standing with its landlord, with at least a year remaining on the lease

Using this information, the credit card receivables company determines the amount of capital it’s willing to advance, the fee, and the repayment percentage. Most businesses with steady credit card sales can get approved, and the approval and funding process is typically completed within two weeks. 

When to use credit card receivables financing

This form of financing is a good option in these circumstances:

• Your business does not have an established credit history. 
• Your business has bad credit card history.
• You don’t qualify for a long-term business line of credit.
• You need cash for your business immediately.

Pros and cons of credit card receivables financing

Credit card receivables financing isn’t right for every business, but it does have some big benefits: 

• It’s easy to get approved.
• Funds have a quick turnaround.
• There’s no set loan term; the payoff time depends on your credit card revenue.

The biggest downside of credit card receivables financing is that it’s significantly more expensive than other kinds of financing.

Alternatives to credit card receivables financing

If you decide credit card receivables financing isn’t for you, you have various other financing options.

• Accounts receivable factoring: With this financing option, also called invoice factoring,  a factoring service buys your customers’ invoices at a discount before their due date in exchange for a cash payment. Consider using a factoring company if your revenue largely depends on how quickly your customers pay their invoices and you need to boost your cash flow in the meantime.
• Business line of credit: A business line of credit is a traditional bank loan that you draw down as needed. If your credit is shaky, you may be able to get a line of credit, as long as it’s secured by a bank account balance. [Related article: Is a Line of Credit or Term Loan Right for Your SMB?]
  

   

• Working capital loan: A working capital loan provides money for operations during a seasonal business’s slow periods. You may qualify if an asset collateralizes the loan. [Learn about working capital loans vs. merchant cash advances.]
• Vendor credit: Your vendors may extend credit that allows you to obtain goods before paying. Using vendor credit is one way to solve cash flow problems.
• Equipment financing: If you need money to buy equipment, you may be able to finance that purchase through the vendor or an outside financing company with a business equipment loan. The equipment is the collateral.
• Business credit card: While business credit cards typically incur high-interest debt, they can help you even out your cash flow if you only have a short cash gap. Learn how to apply for a business credit card.
• Grants, crowdfunding and microloans: Depending on your business, you may be able to get money from grants, microloans, and crowdfunding. Some of these sources don’t require repayment.

Credit card receivables financing FAQs

How long does it take to pay off credit card receivables financing? 

The repayment term is typically between 30 days and six months, but it can go up to several years.

How much can you get from credit card receivables financing? 

The amount is usually somewhere between $3,000 and $300,000, depending on the business’s needs, revenue, and other qualifications.

How quickly can you get the cash once you’re approved? 

Most businesses get their cash within one or two days, but it can take as long as two weeks in some cases.

What credit score do you need for credit card receivables financing? 

Since the loan is secured with your future credit card sales, your credit score is less important with this financing than with most other kinds. Business owners with credit scores as low as 500 have gotten approved, but your credit score will impact the amount you can get and the fee you pay.