Credit Card Receivables Financing

What is credit card receivables financing?

Credit card receivables financing, also known as credit card factoring or merchant cash advance (MCA), 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 current 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 are repaid 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 take payments.

For example, let’s say a retail store is fairly new and must buy a large inventory stock to prepare 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 will lend the retailer $20,000 and tack on a fee between $2,000 and $10,000. The retailer uses the money to buy the inventory. Each month, 15 percent 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, including the following: 

• 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. Typically, the approval and funding process is completed within two weeks. 

When should you use credit card receivables financing?

This form of financing is a good option in the following circumstances:

• Your business does not have an established credit history. 
• Your business has a 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 offer significant benefits. Consider the following pros and cons to evaluate if this funding option is suitable for you:

Pros of credit card receivables financing

• It’s easy to get approved for credit card receivables financing: If you have a high daily credit and debit card transaction volume, you will likely get approved. Your transaction volume acts as collateral and reduces the lender’s risk.
• Credit card receivables financing is credit neutral: Unlike other forms of debt, this kind of financing will not negatively impact your business credit score.
• Credit card receivables financing puts cash in your hand quickly: Once you’re approved, funds are available quickly.
• The payments fluctuate with your sales: There’s no set loan term as each month’s payoff time and amount depend on your credit card revenue.

Cons of credit card receivables financing

• Credit card receivables financing is more expensive than other types of debt: These fees are significantly more expensive than other kinds of financing.
• Credit card receivables financing means you’ll get less revenue from your sales: Since you must pay a percentage of your credit card sales to the lender, revenue is reduced.

Alternatives to credit card receivables financing

If you decide credit card receivables financing isn’t for you, you have various other financing options, including the following:

• Accounts receivable factoring: This financing option, also called invoice factoring, involves a factoring service buying 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.
• Business line of credit: A business line of credit is a traditional bank loan 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 small or medium-sized business?]
• 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. MCAs.]
• 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. 
• Grants, crowdfunding and microloans: Depending on your business, you may be able to get money from small business grants, microloans and crowdfunding. Some of these sources don’t require repayment.