Business owners have had to get creative in the past few years when it comes to getting working capital. When the recession hit, lending practically stopped. The credit markets were frozen because banks were doing everything in their power to avoid taking risk while they counted the bad loans and calculated exactly how much trouble they were in and what was causing this to happen. As they realized that they were getting burned by sub-prime loans, they made more and more efforts to tighten up their underwriting criteria. The result was an economy that made it next to impossible for businesses to qualify for traditional small business loans.

Business Funding Alternatives

Many types of businesses have always benefited from non-traditional types of business funding. One such type is invoice factoring, which has been around for ages. AR factoring is geared towards b2b types who provide a product or service and then bill their customer by sending an invoice. Invoices typically have terms anywhere from 30-90 days, and when you don’t want to wait 30 – 90 days to get paid, you turn to a factoring company. The factor pays you for the invoice upfront (at a discount) and waits to collect the payment from your customer.

Credit Card Factoring

While invoice factoring benefits b2b companies, there wasn’t really a similar alternative for b2c types of businesses like restaurants or retailers. Since these types of businesses don’t typically bill its customers by invoice, they never qualified for AR factoring until a new product emerged out of necessity. The credit card processing loan was born, and it is very similar to invoice factoring. It is geared towards any business that accepts credit cards as a form of payment from its customers. Like invoice factors, merchant cash advance providers purchase sales at a discount, but instead of purchasing the right to collect specific payments or transactions, they purchase a more vague asset, specifically future credit card processing receipts.

Big Differences

One big difference between these two types of business funding is that while invoice factors purchase a transaction that has already occurred, merchant cash advance providers purchase anticipated sales. As a result, these deals are inherently more risky. Credit card processing loan underwriters have to assess a business’s ability to generate the receipts being purchased because if the company fails to produce these sales, then the MCA provider is out of luck, left holding on to a worthless or non-existent asset.

Surprisingly, when you compare the costs associated with both of these types of business funding, they are somewhat in line with each other despite the fact that credit card processing loans are so much riskier. To learn more about this type of business funding, or to find out how much money you might qualify for, give us a call and we’ll be happy to give you an idea over the phone without any commitment, and no costs or obligations.