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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Unlike other lenders, AdvancePoint Capital makes the loan application process a simple, straightforward experience.
Our marketplace of small business financing options include business loans, business line of credit, traditional small business loans, unsecured small business loans, invoice factoring, equipment loans and leasing as well as alternative financing such as business cash advance.
How Do Credit Card Processing Loans 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.
Merchant cash advances are perfect for businesses that processing a high volume of there sales through credit card processing.
Many small business owners can qualify for this product. The most common businesses that prefer merchant cash advance are restaurants, dry cleaners, merchandise store fronts, medical practices, auto service centers, online e-commerce stores, and other business that receive payments regularly through merchant processing. Merchant cash advance is commonly used for 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 business funding 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.
Popular Uses of Credit Card Processing Loans
- Cash Flow-Working capital to support the cash flow of the business.
- Equipment-Purchasing equipment
- Business Expansion-Finance business expansion plans
- Emergencies- Funding those unexpected emergencies that arise in a business.
- P.O.S. Systems- The costs of upgrading POS systems are high and financing elevates the burden of the purchase.
- Inventory- Funding inventory to support sales
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.
How To Apply For Credit Card Processing Loans?
- Choose a lender- When looking for a credit card processing loan you first must choose the right business originator. Look online and research who you want to work with. Look at reviews and the reputation of the lender, broker, or business finance originator before taking application.
- Initial Interview- You will have an initial interview with the business loan originator of your choice and get an idea of qualifications and programs they offer to determine if it's a good fit to apply.
- Application- Once you choose your originator(s) you want to apply with you will need to fill out there business funding application which includes both business information and personal information.
- Documentation- With a merchant processing loan you typically will provide 3 months business bank statements and (if applicable) 3 months merchant processing statements with your application for an offer.
- Pre-Approval & Offer- Offer(s) are provided via a term sheet or disclosure which will outline product features, cost, rate, terms and conditions.
- Compare, Choose & Save- When shopping for financing for your business, its always important to compare offers and terms to determine what best for you and your business.
- Acceptance- Once you accept an offer you will provide closing stipulations and sign an agreement to consummate.
- Funding- Lender/funder conducts final review to clear all remaining stipulations and conditions and then releases funds.
Alternatives to Credit Card Processing Loans
Although your interested in credit card processing loans, its important to consider other options as well to determine what is best for you and your business.
- Small Business Loan- Small business loans are term loans with fixed rates and terms that range from 3 to 36 months to repay. Good credit is required as well as solid cash flow through the business bank statements.
- Business Line of Credit- A business line of credit is a revolving line that gives the ability for a business to draw money off the line on-demand up to a pre-determined credit limit. Interest is only applied based on the balance making it cost effective for short term financing. Good credit and bank statement health are a must for approval and a business must be at least 2 years old.
- Business Cash Advance- Similar to a merchant cash advance, a business cash advance is a purchase of future sales from the business based on current revenue and repaid out of future sales deposits. A convenience ACH payment is made weekly or daily until the purchase is completed. Flexible with credit and cash flow with higher approval rates than traditional financing.
- SBA Loans- The Small Business Administration administers small business loan programs to assist businesses with financing. Requirements and qualifications can be challenging and good credit is required. The rates and terms are very attractive.
- Equipment Financing- Equipment financing uses the collateral of the equipment to offer terms from 2 to 5 years, with monthly payments. The type of equipment and your credit as well as your monthly revenue will dictate rate and terms.
- Invoice Factoring- Invoice factoring is a purchase of an invoice at time of issuance by a invoice factoring company who will purchase at a discount which is the fee. A very affordable option to accelerate cash flow and not have to wait to get paid based on invoice terms.
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