People Also Ask:
Is a Merchant Cash Advance a Loan?
Though you do receive a lump sum that you have to pay back, Credit Card Processing Loans technically aren’t “loans” at all. Instead, it’s categorized as a “cash advance.” You are selling a portion of an asset (revenue from debit and credit card sales). Hence, Credit Card Processing Loans will not show up as “debt” or a “liability” on your balance sheet.
What Happens If You Default On a Credit Card Processing Loan?
If you believe you won’t be able to pay off the total amount by your due date, contact us immediately. There are many possible solutions to explore before resorting to extreme measures. Most business financing companies will do everything in their power to prevent borrowers from defaulting. We may be able to alter your rates or terms to make it easier for you to pay off your remaining amount.
What’s the Difference Between a Merchant Cash Advance and a Loan?
The primary difference between Credit Card Processing Loans and traditional business loans is the repayment structure. Instead of fixed, monthly payments, the size of your payments depends on your sales volume. And you can make payments whenever you batch out your transactions (daily, monthly, etc.). With a traditional business loan, you pay the same amount every month, regardless of how many sales you made.
However, Credit Card Processing Loans tend to carry higher rates and fees than traditional business loans. Thus, you’ll probably pay more in a month for the former than you would for the latter.
Are Credit Card Processing Loans the Same Thing as Invoice Factoring?
These two terms often get mixed up because yet another name for Credit Card Processing Loans is “Credit Card Factoring.” Yes, both options technically involve obtaining financing based on your sales. But with Invoice Factoring, a company literally purchases your accounts receivables. You don’t owe any money. With Credit Card Processing Loans, the company purchases a portion of your future debit and credit card sales.
How Much Do Business Loans on Credit Cards Sales Cost?
There’s one more main difference between a term loan and a credit card processing loan. While a term loan comes with interest, a business loan on credit card sales comes with a factor rate and a retrieval rate. The factor rate works a lot like interest. It’s the percentage on top of your original loan that you’ll pay to your lender. Your factor rate multiplied by your original loan amount = the ultimate cost of your funding. The retrieval rate is the percentage that goes back to your lender until you pay off the entire balance.
For example, let’s say that you have a $50,000 credit card processing loans.
If you have a factor rate of 1.15%, then your ultimate cost is $57,500. That is, this is the amount that you will pay your lender once you’ve paid off your entire funding amount.
$50,000 x 1.15 = $57,500.
Your retrieval rate is the percentage of your 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 $2,000 in credit card sales on a given day. If your retrieval rate is 10%, then your lender will receive $200 that day.
$2,000 x 0.10 = $200.
Once you know your funding amount, your factor rate, and your retrieval rate, then you can easily calculate your costs.
Are Credit Card Processing Loans Right For Your Business?
Like any other business financing product, Credit Card Processing Loans are designed for specific scenarios and types of businesses. For instance, Credit Card Processing Loans will likely have the least impact on your cash flow if you make high volumes of debit and credit card sales. Then again, Credit Card Processing Loans could also be very advantageous for seasonal businesses. You could make investments during your slow season to prepare for the busy season. Since payments fluctuate with sales, you wouldn’t have to pay off the majority of the debt until sales start to pick up.
One of the most significant advantages of Credit Card Processing Loans is accessibility. You don’t need excellent credit or many years in business to get approved. This is why Credit Card Processing Loans tend to carry higher rates and fees than other products. Thus, if you do have excellent credit and strong business history, you may be able to qualify for different products with lower rates and fees.