Credit card processing loans are a good alternative to short-term loans for businesses, and they are easy to access for merchants with good sales volume. Even though they are frequently referred to as loans, they are actually advances on sales – typically credit or debit card sales, rather than loans. However, it can be costly, so it’s critical to fully understand the expenses and the ways in which a commercial cash advance) differs from a standard small business loan.
What Are Credit Card Processing Loans?
A credit card processing loan, often referred to as a merchant cash advance (MCA), is a type of financing designed for businesses that primarily earn revenue through credit card sales. Unlike traditional loans, loans on credit card processing provide an upfront sum of cash to the business, which is then repaid over time through a percentage of future credit card sales. This way, it’s easier for businesses to repay the loan by aligning payments with their sales flow.
How Do Business Loans Through Credit Card Processing Work?
The flexibility of merchant credit card processing loans makes them popular with businesses with fluctuating revenue, as repayment scales with sales. Here’s how such a loan typically works:
- The lender evaluates the business’s average monthly credit card sales. Based on this data, they offer a cash advance, usually a percentage of the projected future sales.
- Instead of fixed monthly payments, repayment is made by deducting a predetermined percentage of the business’s daily or weekly credit card sales. This percentage-based approach means the repayment amount adjusts with the volume of sales, which can help businesses manage cash flow more easily.
- Unlike traditional loans, which come with a fixed payment schedule and interest rate, credit card processing loans function as an advance against future sales. As a result, businesses repay the advance more gradually, based on actual revenue rather than fixed installments.
However, the costs and fees associated with these advances can be higher than with traditional loans, which is important for businesses to keep in mind when exploring financing options.
The Merchant Cash Advance Process In-Depth
This type of business funding is a convenient and flexible way to access funds based on future sales. We’ll break down how credit card processing loans work – from the simple approval process to the unique repayment structure.
How the Funding Process Works
The approval for a merchant cash advance is based on a business’s average monthly credit card sales. That’s why lenders assess these sales to determine the amount they’re willing to advance. Once assessed, businesses with consistent and strong credit card sales typically qualify for higher loan amounts, as their revenue offers a reliable basis for repayment. The good thing is that this quick assessment and reliance on sales volume make these loans accessible even for businesses with lower credit scores or limited access to traditional financing.
Repayment Process Explained
Instead of fixed monthly payments, repayment is made by automatically deducting a set percentage of the business’s daily or weekly credit card sales. This approach means that repayments vary based on daily revenue. Since the repayment amount is tied to sales, it adjusts automatically:
- If sales are high, the business pays more on that day,
- if sales are low, the repayment amount is proportionately smaller.
Typical Terms, Fees, and Interest Rates
Loan terms vary widely based on the lender and the business’s monthly sales but usually range from 3 to 18 months. Instead of a traditional interest rate, many credit card processing loans use a factor rate, typically between 1.1 and 1.5. This rate determines the total repayment amount (for example, a loan with a factor rate of 1.3 means a business would repay $1.30 for every dollar borrowed). Keep in mind that many lenders also charge origination fees, processing fees, or administrative costs, which can increase the total repayment amount.
Benefits of Credit Card Processing Loans
Merchant cash advance loans offer a range of benefits, and that’s what makes them an attractive financing option for small and mid-sized businesses with steady credit card sales. One of the biggest advantages is the quick and easy access to funds. Businesses can usually get cash in just a few days thanks to an easy application process that doesn’t require a lot of paperwork. This quick funding is perfect for businesses that need working capital right away to pay for unexpected costs or take advantage of chances that only last a short time.
Flexible Repayment Structure
One of the best things about these loans is that the terms of repayment are open and change based on sales. This makes an adjustable repayment structure that easily changes based on how well the business is doing. This gives businesses more options, which helps them keep their cash flow steady, especially if their income changes with the seasons.
The Approval Rate Is High
One more benefit of these loans is that the approval rate is higher than the approval rate for standard bank loans. Many businesses that might not be able to get a bank loan find these loans easier to get because they are approved based on credit card sales rather than credit score or financial background. This method gives businesses an important option to traditional lending, which may be hard for them to get because of the strict requirements.
Last but not least, these loans are suitable for businesses with lower credit scores. Companies with little or no credit past can still get approved because lenders care more about how much money the company has made than its credit score. Because these loans are easy to get, they are great for new businesses or people who are trying to improve their credit.
Drawbacks of Credit Card Processing Loans
While credit card processing loans offer quick access to cash, they come with a few downsides. One of the main drawbacks is the high fees and interest rates, which can make them more expensive than traditional loans. Additionally, since repayment is automatically taken from daily sales, businesses may experience reduced cash flow, and that can impact their daily operations. Finally, these loans aren’t ideal for businesses with low or inconsistent credit card sales, as fluctuating income can make it harder to manage repayments effectively.
Who Can Benefit From Merchant Cash Advance
Cash advances for businesses are an excellent financing option for merchants that rely heavily on credit card sales. These loans offer flexibility and quick access to funds, making them ideal for various types of businesses, especially those with high transaction volumes. Here’s a breakdown of different types of businesses that typically benefit:
- Retail stores – with high credit card transaction volumes, retailers can access funds quickly to cover inventory, operational costs, or growth opportunities.
- Restaurants are businesses that often have significant credit card sales, and that makes them well-suited for repayment options tied to daily or weekly card transactions.
- Companies with peak seasons can benefit from credit card processing loans to manage cash flow during the off-season.
- E-commerce businesses can leverage loans based on their card-not-present transactions, which provides a solution for those with fluctuating revenue and diverse e-commerce payment options.
- Businesses in industries like hospitality, travel, or adult services may have trouble qualifying for traditional loans but can benefit from credit card processing loans due to their consistent credit card sales. These high-risk business owners often face challenges securing loans, but credit card factoring along with merchant services tailored for high-risk accounts can provide an accessible alternative.
- Newer businesses, those with poor credit, or companies facing PCI compliance challenges can use these loans to access capital without the strict requirements of applying for a merchant account or dealing with acquiring bank restrictions.
In essence, these loans are particularly helpful for businesses facing challenges like credit card fraud prevention, different charges like interchange fees, or high credit card transaction fees. Combined with credit card processing companies that offer convenient solutions like a cash discount program, these loans can help a business a lot.
How to Apply for a Credit Card Processing Loan
If you’re worrying about applying, you should know that it’s a quick and simple process. Start by gathering your sales data, including your average monthly credit card sales, as lenders typically rely on this information to determine your loan eligibility. They will use this data to assess how much you can qualify for based on your sales volume.
Once you have your merchant statements ready, you can fill out a short online application form, which asks for basic business information such as your business name, type, and contact details. Many lenders specialize in offering these types of loans to businesses with high credit card transaction volumes.
Lenders primarily look for a consistent credit card sales history and monthly revenue when evaluating your application. This helps them determine your ability to repay the loan. Some lenders may also consider the type of industry you’re in, as certain sectors have more specific requirements. With quick approval times, often within a few days, they offer an accessible funding option with minimal paperwork. Once approved, you can receive the funds you need to keep your business running smoothly, even during periods of cash flow challenges.
Alternatives to These Types of Loans
While credit card processing loans offer a flexible and quick funding option, there are other financing alternatives for businesses in need of capital. When compared to merchant cash advances, these alternatives typically offer more rigid terms and may require higher qualifications. These include:
- Traditional small business loans from banks or online lenders can provide larger sums of capital with fixed terms. However, they often require a strong credit history and can have longer approval times compared to credit card processing loans.
- A business line of credit provides access to funds up to a set limit, allowing you to borrow and repay as needed. This option offers flexibility and can be used for ongoing expenses. However, it may require a good credit score and can have higher interest rates compared to credit card processing loans.
- Business credit cards are ideal for smaller, short-term expenses and offer the advantage of rewards or cashback on purchases. However, they come with high interest rates and limited credit limits, making them less suitable for larger funding needs.
Small business loans or lines of credit might be more appropriate for businesses needing larger amounts of funding or looking for more traditional loan options.
Make the Right Financing Choice for Your Business
While these types of loans provide fast funding and a relatively simple application process, it’s important to take into account factors like high fees and the impact on cash flow before proceeding. It means that before deciding if a credit card processing loan is the right choice for your business, it’s essential to evaluate your sales patterns and overall financial needs.
If you’re uncertain about whether this financing option is the best fit, we recommend consulting with a trusted credit card processing company like Merchant Chimp. We offer personalized advice to help you make the right decision for your business. If you’re in need of more, like our tailored merchant services and credit card processing services, you should contact us, and we’ll find a solution for your needs.
