Credit card receivables financing gives business owners cash immediately based on their day-to-day credit card sales.
Today’s small businesses, like their predecessors, often struggle with managing a smooth flow of money into, through, and out of their businesses. And while much has been written about cash flow solutions for the long-term, it’s tougher to find advice on how to raise cash quickly when your business has bills to pay and debt obligations to meet.
Here’s an overview of what you should know about borrowing against your credit card receivables.
1. Also known as a merchant cash advance
The phrase “credit card accounts receivables financing” might sound unfamiliar to you. Yet you have probably heard of a merchant cash advance. They’re the same thing. You’re receiving an advance on your merchant credit card sales.
2. Credit card receivables financing and credit card factoring
Use these terms interchangeably as credit card factoring and credit card receivables financing mean the same thing.
3. Credit card receivables factoring and invoice factoring are different
Don’t get these two terms mixed up. True, both options involve getting financing based on your sales. However, with invoice factoring, a company buys your accounts receivables from you. They then take on the responsibility of collecting money from your customers. The amount of money you’ll receive depends on the terms of your contract, yet with invoice factoring you could get immediate access to about 80% of your receivables.
4. Borrowing against your receivables is nothing new
Businesses borrowing against expected sales not yet collected isn’t new. In fact, some sources suggest factoring arrangements were first introduced in ancient times as mentioned in the Code of Hammurabi.
5. Credit card receivables financing is not a traditional loan
Card receivables fall into the category of alternative lending. Alternative lending refers to any sort of financing through non-traditional channels, such as secured loans or unsecured loans. However, even though it often gets described as a form of alternative lending, credit card receivables financing isn’t really a loan at all. Alternative lending often offers businesses more flexibility and faster application and approval processes than traditional business lending.
6. Offers small amounts of financing
Have you ever approached a bank for business financing only to find their smallest business loan is more than you need? And that your business income doesn’t meet the loan requirements anyways? Credit card receivables financing could be the answer. Amounts financed can range from $7,500 to over $1 million.
7. The amount you can borrow depends on your credit card sales
With this type of financing, the amount of money you receive depends on your regular, day-to-day credit card sales. Think of it more as an advance of a portion of the sales your business makes that can get verified against your business’ credit card receipts.
8. No minimum amount due
When you finance your credit card receivables, your payments work differently than they would if you had a loan. They do not include a set amount payable every month. Instead, the amount you pay varies depending on your credit card sales. Your repayment includes fees and repayment of the original amount advanced to you.
9. Automatic repayment
You don’t have to worry about missing a payment. Payments get set up to occur automatically based on your repayment terms. Repayment periods typically last anywhere from three to 18 months.
10. Two forms of repayment
With a merchant cash advance or card receivables financing, your repayments could occur as a percentage of future credit card and debit card sales. For example, your payments could get set at 10% of your monthly sales. So the higher your credit card sales, the faster you could pay off your advance. Or they could happen as fixed regular daily or weekly bank account withdrawals through what is known as ACH or Automated Clearing House payments.
11. Your fees get based on your ability to repay
Wondering about the fees for a credit card receivables arrangement? Here’s how it works. Your alternative finance provider calculates a rate called a factor rate, based on their evaluation of your estimated ability to repay. A higher factor rate means you’ll pay more for this type of financing.
12. Factor rates are NOT the same as interest rates
It’s important to understand that a factor rate differs from an interest rate. Factor rates typically range from 1.09 to 1.5. So for an amount of $10,000 and a factor rate of 1.4, repayment would be $14,000. This includes the original amount plus $4,000 in fees.
13. Higher rates and fees
While credit card receivables financing offers several benefits for business owners, its important to know that this form of financing also comes with higher rates and fees than traditional financing and even other alternative lending options.
14. You don’t need perfect credit
Another appealing aspect of this form of business financing is that borrowers don’t require an excellent credit score. So if you have bad credit, or own a newer business with a limited credit history, financing your credit card receivables could be a good option.
15. And you don’t need collateral
One of the appealing features of credit card receivables financing is that you don’t need to secure it against any form of collateral like your home or equipment. However, take note. Depending on your merchant cash advance or card receivables financing provider you might get asked to sign a personal guarantee.
16. Credit card receivables financing offers quick approvals
When you’re trying to solve a short term cash flow crisis, you don’t have the time to go through a lengthy loan approval process. Credit card financing receivables appeal to many small business owners because the approval process happens so quickly. With United Capital Source’s online application, you could have an approval within 24 hours of application.
17. Fast funding with credit card receivables financing
In addition to quick approvals, credit card receivables funding can happen very quickly. This means you get the money you need without delay. One of the things business owners like is how quickly they can access funds. Often it happens within a few days.
18. You can use credit card receivables financing for anything
What can you do with the money you receive? Anything you want. Many businesses choose to use the proceeds for operational expenses to keep their cash flowing smoothly. Or you could use the proceeds to buy supplies for a large project, or for capital costs such as to purchase a piece of new equipment.
19. Doesn’t have a negative impact on cash flow
Since the repayment structuring of accounts receivables financing and credit card receivables financing is tied to income or money coming into the business, you don’t need to add a loan payment to your monthly budget. That’s right – there is no negative impact on cash flow. And that’s a pretty attractive feature when cash flow is your immediate issue.
20. It all happens online
As with other forms of alternative lending, your application approval and funding all happen online. This saves you time and hassle as you don’t need to book appointments for in-person appointments at a financial institution banking center.
21. Good for seasonal businesses
Does your business go through cash flow ups and downs depending on the season? If so, credit card receivables financing can be a good choice because your repayment amount depends on your credit card sales. So when sales are down in your seasonal business, so is your repayment amount.
22. Yet you won’t save money for paying it off early
Your cost of a merchant cash advance or card receivables financing gets based on the factor rate, not on a compounding interest rate. This means you don’t save on your finance costs by paying it off early.
23. Not great for funding long-term growth
While credit card receivables financing offers a fast, flexible yet simple option for short term cash flow woes, it isn’t ideal for funding long-term growth. It’s an expensive way to get access to money quickly. And if yours is a seasonal business with times of low credit card and debit card sales, it can take a long time to repay the amount owed.
You could even find yourself in a situation where you need more money before having paid off the amount owing on your first cash advance. This can quickly turn into a recurring and very expensive credit card receivables financing cycle. Instead, consider applying for a business credit line or small business loan once your short term financing has been approved.
24. Best suits businesses with daily credit card or debit sales
A merchant credit card cash advance or credit card receivables financing arrangement works best for businesses that have a regular stream of credit card or debit sales. That’s because your factor rate and repayment arrangements are based on these sales.
25. You need at least 3 months of official sales documents
Your credit card receivables financing application could be approved within 24 hours and funded within 48 hours. It’s up to you to make the approval process as efficient as possible. So make sure you have the following documents on hand before applying:
- Driver’s license
- Voided check from your business account
- 3 months worth of credit card processing statements
- Online application form
You might call it a merchant cash advance, credit card factoring or credit card receivables financing. Yet whichever name you prefer, borrowing against your credit card sales can help with short term cash flow issues. So if you’re facing a cash crunch, contact us today by filling out an online application.