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.