What is a Credit Card Processing Loan?
A credit card processing loan is not truly a 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 payback. 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 is no longer responsible for paying back the remaining balance owed from the funding as there are no more future sales. With a business loan, there are typically personal guarantees. Merchant cash advances only have a business performance guarantee that does not include if sales are to cease.
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How Do Merchant Cash Advances Work?
Merchant Cash Advances (known as a Purchase of Future Sales Agreements) are an advance of a “lump sum” of money to small business owners upfront that has a discounted purchase price (aka specified amount) to payback. The difference between the advance amount and the amount you have to pay back is a fixed cost and is calculated by a flat rate called a “Factor Rate.”
The advance is repaid by taking a fixed percentage of future credit card sales directly out of the future batches before the processor takes the fees and deposits your these sales into your business bank account until the payback amount is paid back in full. There is no term limit with advances as the fixed back percentage (also known as a specified rate) is set and cannot be changed. The time frame to pay back depends on the volumes of future card sales.
Merchant cash advance 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. 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 their primary source of payment by its customers/clients is a credit card. 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, 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 owners who heavily rely on credit card transactions for their sales deposits.
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.
- Rates: Factor rates 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
- Payments: Fixed percentage Splits from credit card batches in the
- Credit Standards: All credit types considered from excellent to poor
- Documentation: Reduced Documentation. 1-page application, 3 months bank statements, and 3 months merchant processing statements.
The Advantages of Credit Card Processing Loans
- Ability to Leverage Credit Card Purchases for Cash
- Flexibility of Repayment
- 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
- 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.
The Disadvantages of Credit Card Processing Loans
- Costs more than traditional business loans
- Factor Rates instead of principal & interest
- Unable to draw additional money for business until at least 40% paid off
- Length of time of repayment tend to be a year or less, with excepts
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 Merchant Cash Advance?
- 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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Frequently Asked Questions
The biggest benefits are the ability to leverage your future sales for cash to help support the business’s cash flow in the short term. Between the limited documentation needed and the speed in which you can get approved and funded (can be as little as a day or two) is very helpful for small business owners who are in a pinch for working capital money for the business.
A merchant cash advance isn’t technically a loan, but rather an advance from a lender that leverages upcoming credit and debit card sales for instant financing. Business owners may use this money for working capital or other company needs. Of all the financing options out there, a merchant cash advance is one of the most flexible, quick, and reliable ways to get funds into a merchant account quickly.
The short answer is No. Credit and documentation requirements are more lenient than traditional small business loan options. Flexible options, such as a merchant cash advance, business credit card, or business line of credit, can be a sound choice for those looking to find an option that works for them. However, some small business loans will be more difficult to obtain — so it’s important to shop around and discover which option works best for your business needs.
Yes, you can get approved for a merchant cash advance with bad credit. Your options may be limited, and the rates, costs, and terms may be affected by how bad your credit is. However, business owners looking for working capital fast can fall back on this advance option.
The short answer is no. You will be required, at the minimum, at least a reduced amount of documentation. Typical requirements are a 1-page application, three months of merchant processing statements, and three months of business bank statements.
The short answer is no; you cannot get a start-up business loan without showing a history of credit card sales of your current small business. Former business ownership experience with these sales from customers in prior businesses will not help you.