What is a Credit Card Processing Loan?
A credit card processing loan, also known as a business cash advance, is not truly a traditional term loan by definition but an “advance of future credit card sales,” which is offered by a business funder in exchange for a discount on those future sales. That is the amount the business must pay back. The most common term for this kind of small business funding is called a “Merchant Cash Advance.”
Unlike a business loan, if the business’s future sales cease, then the business owner is no longer responsible for paying back the remaining balance owed from the funding as there are no more future sales. With many financing options, including small business loans, there is typically a personal guarantee. Merchant cash advances only have a business performance guarantee that does not include if sales are to cease. Obviously, this product is only available to businesses that have consistent cash flow and regularly accept credit card payments from customers.
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How Do Merchant Cash Advances Work?
Merchant cash advances – also called a Purchase of Future Sales Agreement – are monetary advances given in a lump sum to small business owners with a discounted purchase price (known as a specified amount) to be paid back. The difference between the advanced amount and the amount you have to pay back is a fixed cost calculated by a flat rate called what most MCA providers would say is the factor rate. A business owner can apply for a merchant cash advance and have funds deposited very quickly compared to a traditional loan.
How is the advance repaid? Lenders take a fixed percentage of future credit card sales directly from the future batches before the merchant account provider takes the fees. These sales are then deposited into the business bank account of the business owner until the payback amount is completed in full.
There is no term limit with merchant cash advances because the fixed payback percentage (the specified rate) is predetermined and can’t be changed. However, the payback timeframe depends on the predicted future card sales volumes from the merchant account.
Merchant cash advance based underwriters can predict future repayment time frames by reviewing the business’s past daily credit card activities. The set the fixed payback percentage is established by reviewing a combination of many factors — such as current and past credit card volumes, credit, Industry type, time in business, and many other data points related to the small business owner. With that information, underwriters can set what length they predict it will be paid and therefore establish the specified rate of subsequent credit card sales to be collected.
Who Can Qualify for a Merchant Cash Advance?
A business can qualify potentially for a merchant cash advance if its primary source of payment by its customers/clients is daily credit card sales. A merchant cash advance is far easier to qualify for than a traditional bank business loan, so if the business owner’s credit is not great or the business maintains low average daily balances merchant account, a merchant cash advance could very well be the solution.
Even though the terms for approval are more lenient for a merchant cash advance, there are still restrictions on this type of small business funding. This type of business financing is perfect for business owner who heavily relies on credit card transactions for their sales deposits.
Many small business owners can qualify for this product. Common small businesses that utilize this funding option are restaurants, auto service centers, dry cleaners, online e-commerce stores, and other retail stores. Businesses can utilize this cash flow for working capital, renovations, or other company uses.
- Factor Rate: The factor rate ranges from 1.15 to 1.45 of the funded amount
- Terms: Estimated payback periods are 6 to 18 months with no set term limit
- Fees: 1% to 3% Origination fees
- Repayment Terms: Fixed percentage Splits from credit card batches. No fixed payments. No monthly payments
- Credit Scores: All credit types are considered from excellent to poor. Average business credit is acceptable.
- Documentation: Reduced Documentation. 1-page application, 3 months bank statements, and 3 months merchant processing statements.
Pros & Cons of Credit Card Processing Loans
Every loan option comes with some advantages and disadvantages. Credit card processing offers a wide range of benefits, however, it still has some limitations. Below are some major pros and cons of this loan option:
- Ability to Leverage Credit Card Purchases for Cash
- The flexibility of Repayment. No online payments.
- Payments are not a non-flexible fixed payment but a set percentage of upcoming credit card sales
- Higher Approve Rates Than Traditional Business Loan Products. More tolerant qualifying criteria.
- Lower credit and bank statement requirements are accessible to challenged businesses.
- Fast Approval Process and Business Funding
- The process from application to funding can be as little as one day with funds then sent in just a few minutes.
- Premium Cost. Costs more than traditional business loans and other lenders
- Factor Rates instead of principal & interest rate
- Unable to draw additional money for business until at least 40% paid off
- The length of time of repayment tends to be a year or less, with exceptions
- Payments are collected on most business days. No periodic payments.
The Most Popular Uses of Credit Card Processing Loans
- Cash Flow
- Business Expansion
- Purchase P.O.S. systems
- Invest in inventory or supply
- Cover accounts receivable issues
What is Needed to Apply for a Credit Card Processing Loan?
- 1 Page Application
- Business Bank Statements
- Merchant Processing Statements (if applicable)
*Requirements can vary. Some require only bank statements, but others will require more.
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