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Intro To Credit Card Factoring
For many small business owners, the traditional business loan just doesn’t work. They might experience occasional dips in revenue or extreme bursts in activity followed by slow periods. This makes it very difficult to make fixed payments month after month. Maybe they don’t have the credit score or perfect cash flow required to qualify for traditional options. If this sounds like you, Credit Card Factoring might be the business financing tool you’ve been looking for.
Like a business term loan, you receive a lump sum that you can use for virtually any purpose. However, the requirements and repayment structure are very different than traditional products. Your eligibility and ability to repay depends on your debit and credit card sales. And when it comes to costs, rocky cash flow can help you save money.
In this guide, we’ll answer the following questions:
- What is Credit Card Factoring?
- How Does Credit Card Factoring Work?
- What Are The Advantages of Credit Card Factoring?
- What Are The Disadvantages of Credit Card Factoring?
- How Do You Apply for Credit Card Factoring?
- What If I’m Declined for Credit Card Factoring?
- Is Credit Card Factoring a Loan?
- What Can Credit Card Factoring Be Used for?
- How Do You Qualify for Credit Card Factoring?
- What Does Credit Card Factoring Cost?
- When is Credit Card Factoring Right for Your Business?
What is Credit Card Factoring?
Credit Card Factoring is sometimes referred to as a Merchant Cash Advance or even a Credit Card Processing Loan. You receive a lump sum that is 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.
Funding Amount
7.5K – $1M
Funding Term
3 months – 18 months
Rates
Starting at 1.09
Speed
1-2 Business days
How Does Credit Card Factoring Work?
With Credit Card Factoring, payments are automatically deducted whenever you batch out 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, which is based on your 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’d pay back $10,000 per month, with daily payments of $333. If your average sales dropped to $70,000 per month, 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 business financing products in existence. Unlike other products, you don’t need excellent credit and perfect cash flow to qualify. These loose requirements make it possible for companies to approve and distribute funds in less than 48 hours. If you need cash quickly and can’t qualify for other options, this might be the best choice.
Another significant advantage is the repayment structure. With traditional business loans, you have to make fixed payments every month, regardless of how well your business is doing. With Credit Card Factoring, on the other hand, the size of your payment 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 that cannot meet the requirements for traditional business loans. These business owners might have poor credit or unstable cash flow. This suggests that they might not be able 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 much more challenging to qualify for.
When combined with the repayment structure, high rates can put severe pressure on your cash flow. You might pay high rates even if you made strong sales for several months.
And though you don’t have a minimum monthly payment, you do have to pay back your total amount by a specific date. Every company has its policy for how they deal 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. With traditional loans, paying early means paying less interest or fees.
Pros
- Get access to funds quickly
- 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 services provider
- Shorter repayment term may reduce cash flow
Credit Card Factoring Compared To Other Products
| Loan types | Max Amounts | Rates | Speed |
|---|---|---|---|
| Credit Card Factoring | $7.5k – $1m | Starting at 1.09 | 1-2 business days |
| SBA Loan | $50k-$10m | Starting at 5% | 3-5 weeks |
| Business Term Loan | $10k to $5m | Starting at 5% | 1-3 business days |
| Business Line of Credit | $10k to $250k | Starting at 8% | 1-3 business days |
| Receivables/Invoice Factoring | $50k-$10m | Starting at 5.8% | 1-2 weeks |
| Equipment Financing | Up to $5m per piece | Starting at 5% | 3-10 business days |
| Revenue Based Business Loans | $10K – $5m | Starting at 9% | 1-3 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:
If you have the required information on-hand, the application takes just a few minutes. Funds can appear in your bank account in under 48 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 indeed 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, much smoother.
Step 2: Gather Your Documents
The application requires the following documents and information:
- Driver’s license
- Voided business check
- Bank statements from the past three months
- Credit card processing 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 Representative
Once you apply, a representative will reach out to 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 you’re approved, you’ll hear back from us within 24 hours. Funds should then 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 UCS. These alternatives are usually easier to qualify for than business loans.
If you were declined for poor credit, consider our credit repair services as well. We can help you boost your credit score by identifying the issues that are keeping your score down and creating a plan for eliminating them.
People Also Ask:
Is Credit Card Factoring a Loan?
Though you do receive a lump sum that you have to 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 is primarily because rather than taking out a loan, you are actually selling the company a portion of your future sales. 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 your payments are more spread out. And 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, the main requirement for Credit Card Factoring is your debit and credit card sales volume. As long as you have consistent debit and credit card sales, you probably won’t have trouble qualifying for this product.
What Does Credit Card Factoring Cost?
As you know, a business term loan comes with interest. Credit card factoring, on the other hand, involves a factor rate and a retrieval rate. 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 that you’ll pay back. The retrieval rate is the percentage of future credit card sales that goes 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. Let’s say, for example, that you make $1,000 in credit card sales on a given day. If your retrieval rate is 10%, then your lender will receive $100 that day. $1,000 x 0.10 = $100. Once you know your funding amount, your factor rate, and your retrieval rate, then you can easily calculate your costs.
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 volumes of debit and/or credit card sales. 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 full amount in a matter of months.