Credit Card Receivables Financing Guide

What is credit card receivables financing?

Credit card receivables financing, also known as credit card factoring or merchant cash advances (MCA), is a viable source of short-term financing for small businesses that can’t get traditional bank loans. 

Unlike traditional lenders, credit card receivables financing companies ― which may include your current credit card payment processor ― consider your business’s future credit card sales a business asset, so they advance capital based on your projected credit card sales. 

Tornike Asatiani, CEO of Edumentors, noted that growing businesses often encounter payment delays that can slow operations. “Credit card receivables financing helps by turning future sales into immediate funds,” Asatiani explained. “Instead of fixed monthly payments, a percentage of daily sales goes toward repayment.”

How does credit card receivables financing work? 

Credit card receivables financing services provide cash advances that small business owners can use to expand operations, fund marketing efforts or put toward other business needs. These companies advance funds based on your future credit card sales and repayment is made through a predetermined percentage deducted from daily credit card revenue. You can pay the credit card receivables company directly or it may direct its payment processor to take payments. 

For example, let’s say a new retail store must purchase a large inventory stock to prepare for the holiday shopping season. While it has ongoing credit card revenue, it doesn’t have enough in the bank to purchase the $20,000 worth of inventory it needs. 

A credit card receivables company advances the retailer $20,000, charging a fee between $2,000 and $10,000. The retailer uses the funds to buy inventory. Each month, 15 percent of the store’s credit card revenue is deducted until the total $20,000 plus fees are repaid.

Who can get approved for credit card receivables financing? 

Credit card receivables financing providers consider a business’s credit card sales to determine its monthly credit card revenue. They also look at the business owner’s credit score and a few other factors, including the following: 

• Time in business (at least one year preferred)
• Ability to provide merchant processing statements with at least $4,000 per month in revenue for the last six months
• Absence of open tax liens, judgments or bankruptcies
• Acceptable business and personal credit
• Whether the business is in good standing with its landlord, with at least a year remaining on the lease

Using this information, the credit card receivables company determines the amount of capital it’s willing to advance, the fee and the repayment percentage. Most businesses with steady credit card sales can get approved. Typically, the approval and funding process is completed within two weeks. 

When should you use credit card receivables financing?

This form of financing is a good option in the following circumstances:

• Your business lacks an established credit history. 
• Your business has a poor credit history.
• You don’t qualify for a long-term business line of credit.
• You need immediate cash for your business.

Pros and cons of credit card receivables financing

Inge Von Aulock, investor and chief financial officer of Invested Mom, advised businesses to carefully evaluate whether credit card receivables financing is the right move for them. “The costs are typically higher than traditional financing and it can put a real strain on your cash flow if you’re not careful,” Von Aulock cautioned. “But when used strategically — with clear eyes on the true costs and a solid plan for using the capital — it can be a powerful tool for growth.”

Consider the following pros and cons of this funding option:

Pros of credit card receivables financing

• It’s easy to get approved. If you have a high daily credit and debit card transaction volume, you will likely qualify. Your transaction volume acts as collateral and reduces the lender’s risk.
• Credit card receivables financing is credit neutral. Unlike other forms of debt, it will not negatively impact your business credit score.
• You’ll receive funds quickly. Once approved, funds are typically available within days, making it a fast financing option.
• The payments fluctuate with your sales. Von Aulock noted that there is no set loan term, as each month’s repayment depends on credit card revenue. “I’ve seen this work beautifully for seasonal operations or when you need quick capital for expansion,” Von Aulock said. “The best part is your payments flex with your sales — when business is slower, you pay less. When it’s booming, you pay more.”

Cons of credit card receivables financing

• Credit card receivables financing can be expensive. These fees are significantly more expensive than other kinds of financing. “This financing [keeps] things moving, but fees add up quickly,” Asatiani cautioned.
• Your revenue will be impacted. Asatiani emphasized that credit card receivables financing differs from a traditional loan. “Many think it’s just like a loan. It’s not. No fixed term, just a cut of daily sales,” Asatiani explained. Because repayment is tied to daily transactions, your available revenue is reduced. “For businesses with steady transactions, it’s a great tool,” Asatiani noted. “But if margins are tight, it can cost more than expected. 

Alternatives to credit card receivables financing

If you decide credit card receivables financing isn’t for you, you have various other financing options, including the following:

• Accounts receivable factoring: Also known as invoice factoring, this financing option involves a factoring service purchasing your outstanding invoices at a discount in exchange for immediate cash. If your business relies on customer payments and needs to improve cash flow, a factoring company can provide faster access to funds.
• Business line of credit: A business line of credit is a flexible financing option that allows you to borrow funds as needed up to a set limit. If your credit is less than ideal, you may still qualify by securing the line of credit with a bank account balance or other collateral. [Related article: Is a Line of Credit or a Term Loan Better For Your Business?]
• Working capital loan: A working capital loan provides short-term funding to cover operational expenses during a seasonal slowdown or cash flow gap. You may qualify if you can secure the loan with collateral, such as inventory or accounts receivable. [Related article: ​​What Are MCAs and Working Capital Loans?]
• Vendor credit: Your vendors may extend trade credit that allows you to obtain goods before paying. Using vendor credit is one way to solve cash flow problems.
• Equipment financing: If you need funds to purchase equipment, you may qualify for financing through the vendor or a third-party lender with a business equipment loan. The equipment itself serves as collateral, reducing the lender’s risk.
• Business credit card: While business credit cards typically incur high-interest debt, they can help you even out your cash flow if you only have a short cash gap. 
• Grants, crowdfunding and microloans: Depending on your business, you may be able to get money from small business grants, microloans and crowdfunding. Some of these sources don’t require repayment.