Credit Card Receivables Financing: Is it Right for Your Business?

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Alternative lending, like credit card receivables financing, is the saving grace of many businesses. New entrepreneurs or those working to build business credit may benefit from the arrangement.  This financing could hold you over until you can qualify for traditional loans.Some lenders may even help you build business credit in the process.

Financing your credit card receivables isn’t for every business or every funding need. But those who need help with cash flow or short term business operations should look into it. After learning what it is and how to use it, you’ll know if credit card receivables financing is right for your business.

What is Credit Card Receivables Financing?

You may have heard if called by other names. Credit card factoring and merchant cash advances  and credit card receivable are all the same. This type of financing is when a lender purchases a business’s projected future credit/debit card transactions. Essentially, it’s a business cash advance guaranteed by anticipated credit card sales.Business Financing Hub - Credit Card Receivables Financing

How it Works

Lenders estimate transactions based on the company’s previous track record. Then they purchase at a discounted rate. Once the lender evaluates your business credit card sales, they advance you the full amount based on their discounted purchase price. Amounts usually range from $5,000 to $500,000. The American Express Merchant Financing program lends up to $2,000,000.

The lender arranges payments on the advance directly with the credit card processing company. They take a percentage of the daily transactions from credit and debit card sales until your business has paid off the loan plus fees. Repayment can happen as fast as within a week or a few years. It all depends on the agreement and how much revenue your company bring in.

Benefits of Credit Card Receivables Financing

When you’re able to get a lump sum of cash at once, it can help you preserve your business cash flow. If your cash flow it low, credit card factoring can give you the boost you need to build it. This loan is ideal to help with purchasing supplies, funding marketing and advertising, or funding a large unexpected purchase order.

Another benefit is the setup of repayment. Businesses don’t have a set number of years to repay. It’s based on daily card transactions, so the lender bases the percentage on the revenue per day. That means you’re not stuck with no cash flow or struggling trying to pay back the loan.

The biggest advantage is businesses having access to cash quickly. Most banks would have a lengthy process and waiting period. If a new business was even able to qualify, they wouldn’t be able to get the money within a few days like with credit card factoring. That amount of funding within that short period is a huge benefit.  It can also help seasonal businesses keep their head above water.

How to Get Credit Card Receivables Financing

Companies interested in getting this type of financing should first make sure they have adequate revenue coming in from card sales. You should also make sure credit card factoring is the right type of funding for your business. Once you know for sure, you can work with a lending expert to find a reliable company. Most banks and traditional lenders don’t provide this type of funding. Check with your credit card company or other reputable alternative lending sources.

Is Credit Card Receivables Financing the Right Option for Your Business?

Whether merchant cash advances make sense for your business depends on a few things:

  • Type of Business
  • Length of Time in Business
  • Creditworthiness
  • Business goals

Type of Business

Most companies that credit receivables financing lenders will patronize have high volume card transactions. Businesses like retail stores, restaurants, or movie theaters bring in more revenue from credit and debit sales than they do cash. Some contractors and service industry businesses can qualify for credit card factoring too. It depends on their transaction volume.

Length of Time in Business

There is no set amount of time you have to be in business, but most newer companies apply for merchant cash advances. Older companies who haven’t established substantial business credit may apply too. It depends on which type of loan will benefit you most.

Creditworthiness

Businesses with low credit scores can still apply for this loan. If you don’t have enough business credit history, this loan may be for you too. With credit card receivables financing, companies prove their ability to pay in a different way than a credit file and score. The lender advances money based on how the business has been performing. They also minimize their risk by arranging  payments directly from the credit card processor.

Business Goals

Credit card factoring can help if you want temporarily improve your cash flow. The loan provides a lump sum that you can pay back in small increments. Your new cash flow boost can stay in tact while staying in good standing with the loan. As you continue gaining money through credit card transactions, the lender takes their cut and you keep the rest.

How You Should Use Credit Card Receivables Financing

If you want to fund long-term investments or large purchases, you shouldn’t rely on this type of financing. Fees and interest for this type of funding can be much higher than traditional loans. That makes the cost outweigh benefits and return. A merchant cash advance isn’t the type of loan for covering hiring expenses, equipment costs, or real estate.

Like with unsecured business lines of credit, focus on projects with short turnaround. Advertising, supplies, and resources that you know you’ll use to make money soon make more sense. Use the funds with a goal of getting money in the business fast. That way you won’t have to continue borrowing under high interest terms. You’ll have the credit and revenue to look for better funding options.

Like all alternative funding options, keep a goal in mind. Use the funds to supply small working capital or cash flow needs. All other objectives should be short term. Always have a goal to supply temporary business needs, use credit responsibly, and build business credit. From there, you can expand your options to better financing that will support long-term growth.

Learn More About Credit Card Factoring at Business Financing Hub

Our team of entrepreneurs created this website for business owners like you. We’ve built companies from the ground up too. Then we decided to share our experiences to help others. For more information about credit card receivables financing, search BusinessFinancingHub.com. While you’re here you can also apply for business credit cards with competitive rewards.