Businesses that accept credit card payments often have a solid grasp on their short-term revenue projections. Yet, unforeseen circumstances may lead to a pressing cash crunch, making it difficult to wait for credit card transactions to clear. Credit card receivables financing offers businesses a way to access that money right away.
Learn more about credit card receivables financing, its inner workings and how it can benefit small business owners.
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.
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.
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:
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.
This form of financing is a good option in these circumstances:
Credit card receivables financing isn’t right for every business, but it does have some big benefits:
The biggest downside of credit card receivables financing is that it’s significantly more expensive than other kinds of financing.
If you decide credit card receivables financing isn’t for you, you have various other financing options.
The repayment term is typically between 30 days and six months, but it can go up to several years.
The amount is usually somewhere between $3,000 and $300,000, depending on the business’s needs, revenue, and other qualifications.
Most businesses get their cash within one or two days, but it can take as long as two weeks in some cases.
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.