Credit card factoring is a relatively new financial tool available to small to midsize businesses. Sometimes referred to as a business cash advance or a merchant loan, it’s slightly different from traditional factoring. In a traditional factoring arrangement, a business has provided a product or service to a customer, who will pay for that product or service within a certain period of time, usually 30, 60 or 90 days. Once the product or service has been provided to the satisfaction of the customer, the business may decide that it doesn’t want to wait 90 days to get paid, so they enlist the services of a third party called a “factor”. Let’s say the invoice amount is $10,000. The factor may offer to buy the right to collect that $10,000 by paying $9,500 to the business upfront. The business is willing to pay $500 to have access to his $10,000 right away, and the factor is willing to wait 90 days to get paid because they stand to earn $500 on their $9,500 investment.
Credit card factoring works similarly. The main difference is that instead of buying the right to receive payments for a receivable that already exists, the merchant loan provider is buying the right to collect payments receivables that don’t exist yet, or future receivables (specifically, future revenues from credit card processing transactions). There is significantly more risk involved simply because there’s no guarantee that the future receivables being purchased will ever come to fruition. For that reason, the cost of this type of factoring is significantly higher. That same $10,000 in receivables may only earn $8,000 for the business.
Because these receivables don’t exist yet, the way that the factor gets paid back is also very different from traditional factoring. The business instructs its credit card processor to assign a small percentage of every sale to the balance on its contract. That percentage can range from 5% to 25%, depending on how much future receivables the business is selling. The percentage is also fixed, so the rate at which the balance gets paid back fluctuates with its credit card revenue. Let’s say that the percentage agreed upon by the business and the factoring company is 10%. If the business does $100 in credit card sales, the credit card processor will pay $10 to the factor, and forward the remaining $90 to the business like normal. Likewise, the business may process $1,000 in sales the next day, in which case the processor will pay $100 to the factor and send $900 to the business. And if the business doesn’t have any credit card sales the following day, then the factor doesn’t get paid anything. These merchant loans can take anywhere from just a few months to 18 months to pay back completely, but no matter how long it takes, the amount purchased by the factor doesn’t change. This type of financing has a fixed cost, so it does not get more expensive over time. This is why merchant loans are great alternatives to traditional business loans.
The key to finding the best deal on your merchant loan is to let people compete for your business. There’s a huge advance to working with an account representative at Sure Payment Solutions because we know the industry and have close relationships with the industry’s leading merchant loan providers. The Sure Payment Solutions staff has helped facilitate over 100 million dollars in business cash advance transactions since 2006. Give us a call today for a free quote.