Like a business term loan, you receive a lump sum that you can use for virtually any purpose. However, the requirements and repayment structure differ significantly from traditional products. Your eligibility and ability to repay depend on your debit and credit card sales.
Love this place. Matt Wiemann was super helpful and hands on the entire process. Was super easy process and everyone was fast , pleasant, and professional. I would definitely recommend them to anyone. I have had 3 loans and this was the easiest one. If you want honest people who will personally walk you thru the entire process then these are the people you want to help your business grow with the proper financing.
Robert Inigo
In this guide, we’ll answer
the following questions
and more:
What Is Credit Card Factoring?
Credit card factoring is sometimes called a Merchant Cash Advance or a Credit Card Processing Loan: same product, different name. It’s also a type of business cash advance. A small business owner will receive a lump sum based on the revenue you draw from debit and credit card transactions. Instead of fixed monthly payments, your payments are deducted as a percentage of your debit and credit card sales. To clarify, your payments fluctuate with your sales volume.
MAX FUNDING AMOUNT
$5K – $1M
FACTOR RATES
Starting at 1-6% p/mo
TERM
3-24 months
SPEED
1-2 Business days
How Does Credit Card Factoring Work?
Credit card factoring automatically deducts payments whenever you batch your debit and credit card transactions (daily, weekly, etc.). The percentage of sales that gets deducted never changes. This percentage is called a Holdback Rate. Each borrower is also assigned a Factor Rate based on their credit score, cash flow, and sales volume. This determines the total amount you have to pay back. Factor rates typically range from 1.09 to 1.5.
For example, let’s say you get approved for $50,000 with a factor rate of 1.4. This means you’d owe $70,000 in total.
As part of this arrangement, you allow the company to deduct 10% of your monthly debit and credit card sales. If your business averages $100,000 in debit and credit card sales per month, you will pay back $10,000 per month, with daily payments of $333. If your average sales dropped to $70,000 monthly, you’d make daily payments of $233 instead.
What Are The Advantages of Credit Card Factoring?
Credit card factoring is one of the most accessible small business financing products. Unlike other products, you don’t need excellent credit or perfect cash flow to qualify. These loose requirements allow companies to approve and distribute funds in less than 48 hours. This might be the best choice if you need cash quickly and can’t qualify for other options.
Another significant advantage is the great repayment structure. With traditional small business loans, you must make monthly fixed payments, regardless of how well your business is doing. On the other hand, with Credit Card Factoring, your payment size depends on your sales volume. Thus, when you have a slow month, you pay less. You only pay what you can safely afford at the time. This repayment structure is particularly ideal for seasonal businesses. You could use the funds during the slow season and most of the money back during the busy season when sales volume increases.
What Are The Disadvantages of Credit Card Factoring?
Credit card factoring is designed for business owners and companies that cannot meet the requirements for traditional small business loans. These business owners might have poor credit or unstable cash flow. This suggests they might be unable to pay off a loan on time. To offset this risk, credit card factoring carries high rates and fees. Other business financing products are much less expensive but more challenging to qualify for.
High interest rates can put severe pressure on your cash flow when combined with the repayment structure. You might pay high rates even if you have made strong sales for several months. To make matters worse, businesses with unstable cash flow can find these high interest rates exacerbating their financial difficulties.
And though you don’t have a minimum monthly payment, you have to pay back your total amount by a specific date. Every company has its policy for dealing with borrowers who aren’t on track to fulfill their terms.
Lastly, since you have to repay a fixed amount of fees, you wouldn’t save on interest by paying early, and with traditional loans, paying early means paying less interest or fees.
PROS
Get access to funds quickly
The approval process is easy
Less than perfect credit accepted
Use for a variety of business purposes
CONS
Higher rates & fees than with traditional loans
May have to change merchant account provider
Shorter repayment term may reduce cash flow
Credit Card Factoring Compared To Other Products
| LOAN TYPES | MAX AMOUNTS | RATES | SPEED |
|---|---|---|---|
| Merchant Cash Advances | $7.5k – $1m | Starting at 1-6% p/mo | 1-2 business days |
| SBA Loan | $50k-$10m | Starting at Prime + 2.75% | 8-12 weeks |
| Business Term Loan | $10k to $5m | Starting at 1-4% p/mo | 1-3 business days |
| Business Line of Credit | $1k to $250k | Starting at 1% p/mo | 1-3 business days |
| Receivables/Invoice Financing | $10k-$10m | Starting at 1% p/mo | 1-2 weeks |
| Equipment Financing | Up to $5m per piece | Starting at 3.5% (SBA) | 3-10+ business days |
| Revenue Based Business Loans | $10K – $5m | Starting at 1-6% p/mo | 1-2 business days |
Who Qualifies For Credit Card Factoring?
Approved businesses generally met the following criteria:
Annual Revenue
$120K+
Credit Score
550+
Time in Business
4 months+
How To Apply For Credit Card Factoring:
The application takes just a few minutes if you have the required information. Funds can appear in your bank account in under 24 hours. Here’s how to get started:
Step 1: Consider Your Needs
Before you begin the application process, take some time to make sure this is the right product for your individual needs. Will you be able to use the funds for your desired purpose? Will the repayment structure do more good than harm to your cash flow? Do you know exactly how much funding to request? Answering these questions ahead of time will make the rest of this process much smoother.
Step 2: Gather Your Documents
The application requires the following documents and information:
- Driver’s license
- Voided business check
- Business bank statements from the past three months
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. At this stage, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will contact you to explain the repayment structure, rates, and terms of your available options. This will ensure that there are no surprises or hidden fees during repayment.
Step 5: Receive Approval
If approved, you’ll hear back from us within 24 hours. Funds should appear in your bank account in 1-2 business days.
What If I’m Declined for Credit Card Factoring?
If your application gets declined, it might be because you don’t have the sales volume to withstand the repayment structure. Your cash flow might be better suited for the monthly payments of a short-term working capital loan.
There’s also the possibility that your business cannot handle too much additional debt at this time. In this case, we might recommend a different financing tool. Possible examples include business credit cards or personal loans, both of which can be accessed through PFO. These alternatives are usually easier to qualify for than business loans.
If you were declined for poor credit, consider credit repair services as well. Credit repair professionals can help you boost your credit score by identifying the issues keeping your score down and creating a plan for eliminating them.
Credit Card Factoring FAQs
Is Credit Card Factoring a Loan?
Though you receive a lump sum you must pay back, credit card factoring is technically not categorized as a “loan” or even “debt.” Instead, it is referred to as a “cash advance.” This becomes more confusing when people use the term credit card processing loan.
This is primarily because you are selling the company a portion of your future credit card purchase rather than taking out a loan. In other words, you are receiving an advance of cash that you will eventually earn on your own.
What Can Credit Card Factoring Be Used For?
You can technically use the funds in any way you like. The intended purpose of the funds will likely have no impact on your application. However, specific initiatives and investments can lower your rates and minimize the effect on cash flow.
For example, rates are usually lower when payments are spread out. Since payments fluctuate with sales, you could use the funds during your slow season without having to make large payments. For this reason, a seasonal business might use the funds to order inventory during the slow season and save their largest payments for the busy season when they actually sell the items.
How Do You Qualify for Credit Card Factoring?
Instead of credit score, annual revenue, or time in business, credit card factoring’s main requirement is your debit and credit card sales volume. This means your business must accept credit cards. You probably won’t have trouble qualifying for this product if you have consistent debit and credit card sales.
The repayment amount for a merchant cash advance depends on future sales projections of the business. Merchant cash advances require significantly less documentation than traditional loans.
What Does Credit Card Factoring Cost?
As you know, a business term loan comes with interest. On the other hand, credit card factoring involves a factor rate and a retrieval rate. Merchant cash advances usually have higher factor rates and fees compared to traditional loans.
The factor rate works like regular interest. It’s the percentage on top of the principal balance that you’ll have to pay back. Your original funding amount multiplied by your factor rate = the amount you’ll pay back. The retrieval rate is the percentage of future credit card sales that go back to the lender until you pay off the entire balance.
For example, let’s say that you factor $50,000 in credit card sales. If you have a factor rate of 1.15%, then your ultimate cost is $115,000.
That is, this is the amount that you will pay your lender once you’ve paid off your entire merchant cash advance. $100,000 x 1.15 = $115,000. Your retrieval rate is the percentage of your daily credit and debit card sales that your lender will receive until you’ve paid off the full amount. For example, let’s say that you make $1,000 in credit card sales on a given day. If your retrieval rate is 10%, your lender will receive $100 that day. $1,000 x 0.10 = $100. You can easily calculate your costs once you know your funding amount, factor rate, and retrieval rate.
When is Credit Card Factoring Right for Your Business?
Credit card factoring makes sense when you need cash quickly, cannot qualify for other options, and have high debit and/or credit card sales volumes. Also, since rates are lower when you take more time to pay, it’s probably best to pursue this product when you know you won’t pay off the total amount in a matter of months.
What's the difference between Credit Card and Invoice Factoring?
These two terms often get mixed up because yet another name for merchant cash advances is “Credit Card Factoring.” Yes, both options technically involve obtaining financing based on your sales. But with Invoice Factoring, an invoice factoring company purchases your accounts receivables. You don’t owe any money. With merchant account loans, the company buys a portion of your future debit and credit card revenues, typically repaid from transactions at the credit card machine.
Can I Get Credit Card Factoring with Bad Credit?
Yes, this product is available to borrowers with bad credit. Remember, your borrowing amount is based almost entirely on your monthly debit and credit card sales. Since credit card factoring’s repayment structure is expensive by nature, borrowers are expected to have bad credit. However, your personal credit score will impact the product’s cost and terms. Thus, if you want to access the lowest possible rates, consider our credit repair services before applying.
Why do some people consider Credit Card Factoring a Scam?
It’s possible you’ve seen some articles discuss credit card factoring as a scam, but it’s crucial to understand that there two different forms of credit card factoring. One is a perfectly legal alternative business funding option based on future credit card payments, and the other is an illegal use of a business merchant account.
Merchant Cash Advances as Credit Card Factoring – Legal
The guide above deals with the legal version of credit card factoring – a merchant cash advance – which is a form of credit card receivables financing. Merchant cash advances can be funded in as little as 24 hours. Merchant cash advances are typically offered to businesses with poor credit who cannot secure traditional loans.
Credit card receivables financing allows businesses to access cash immediately based on future credit card sales. Approval for credit card receivables financing is typically completed within two weeks. The repayment term for credit card receivables financing can range from 30 days to several years.
Unauthorized Use of a Merchant Account
The second form of credit card factoring involves a business using a merchant account that was not specifically approved or set up for them. While this practice might not always stem from ill intent, it is still prohibited. For instance, imagine two small businesses sharing an office or storefront. One business owner might not think twice about letting the other process transactions through their merchant account, assuming it’s a harmless arrangement.
However, this can quickly lead to unethical and illegal practices. Sharing a merchant account puts the account holder at risk for financial responsibility due to chargebacks.
In this context, credit card factoring is also referred to as credit card laundering. This form of credit card factoring is illegal and can lead to felony charges. These types of credit card factoring scams can lead to money laundering. Businesses found guilty of credit card factoring could end up on the Terminated Match File, making it hard to obtain a merchant account in the future.
Applying for new business funding felt overwhelming, most of the lenders we considered didn't meet our business model and had rigid lending criteria that was a "one size fits all" concept. Thank goodness for Pro Funding Options and , who is AMAZING!!!! Within seconds of entering our company details, she gave us a call, answered all of our questions, and we felt in good hands. We got the funding we needed, and it all happened within a matter of a day or two. Highly recommend.
Jennifer Tirado
Why Choose Pro Funding Options?
Why businesses choose PFO:
1
Quick funding options that won’t affect credit
2
Access to 75+ lenders with multiple products to choose from
3
Financing up to $5 million in as few as 3 days
4
4.6 star rating on Google
Industry Experts
We know the ins & outs of business funding.
We’re Available
Always willing to help even after work or on weekends.