Business Financing through Credit Card Processing Loans

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One of the most difficult endeavors of operating a business is securing short-term working capital loans to keep things running smoothly.

Banks and credit unions typically prefer long-term financing. They’re likely to provide business loans for start-up capital or a business expansion that are paid back over several years based on a monthly payment. But many business owners need periodic working capital funding for a variety of reasons.

If a bank has issued a start-up loan that is still being paid off, they may be reluctant to issue additional short-term financing. They may consider the loan to be above their risk threshold based on debt load, credit score, length of time in business, or other risk factors.

The business owner is then faced with a decision. They can accept the bank’s refusal, weather the storm or forego a great business opportunity. Or they can research alternative business financing options.


Credit Card Processing Loans for Business

Credit card processing loans, also known as Merchant Cash Advances, are one of those alternative business financing options. They are less like a business loan and more like a cash advance based on the company’s future earnings. Repayment is not based on a set monthly payment, but as a percentage of credit card receipts on a daily or weekly basis.

For example, the lender may issue a merchant cash advance based on a 20% loan recovery rate. If the business has $1,000 in credit card sales on Day 1, then the lender will deduct $200 as repayment on the cash advance. If credit card sales are $500 on Day 2, then the lender will deduct $100 as repayment.


It’s a flexible repayment schedule based on sales volume, making it a more affordable option on a day-to-day basis than fixed payments. When sales are high, the repayment is high. When sales are low, the repayment is low.


Fast Facts on Credit Card Processing Loans

  • Cash advance amounts are based on average monthly credit card receipts
  • Businesses are required to have at least $10,000 credit card sales per month
  • Business loans are short-term typically within 12 or 18 months
  • Future sales revenue is more important than credit scores
  • Fast loan approval and close with funds available in as little as a few days



Merchant Cash Advances vs. ACH Business Loans

Credit card processing loans and Automated Clearing House (ACH) loans are often mistaken as the same type of business financing. While similar, there are subtle differences.

While merchant cash advances are based on future credit card receipts, ACH cash advances are based on the borrower’s future bank balances. In this way, all company deposits including checks, debit card, PayPal, and credit cards are considered in both the amount of the loan and its repayment. Repayment is automatically withdrawn based on a fixed amount per day, week, or month depending on the agreement.

For those business owners with primarily credit card sales, the Merchant Cash Advance may be more appropriate. For those with a mix of payments, an ACH business loan may provide a better option. Some business lenders combine the two systems by taking a variable amount based on credit card receipts and a fixed withdrawal from the company’s bank account. This can help pay off the loan faster thereby reducing interest expense.



Reasons for Considering Credit Card Processing Loans

A big advantage to credit card processing loans is that there are no restrictions on how it is to be invested. It is worth mentioning that without a return-on-investment (ROI) it becomes a very expensive business financing option. The investment return from the cash advance should exceed the cost of the loan, if not in the short-term, at least in the long-term.

Typical uses for merchant cash advances include, but not limited to:

  • Business expansion/opportunity
  • Bulk and discount inventory purchases
  • Hiring a new employee
  • New or replacement equipment
  • Meeting payroll while waiting for customer payment
  • Complying with government-mandated regulation
  • Paying an important supplier to release a hold on the company’s account
  • Purchasing stock to prepare for a seasonal upswing


Notice that the examples given will generate either increased revenue, decreased costs, or prevent the business from going into decline. The proceeds from the investment will contribute to the debt repayment, mostly in the long run.

Advantages of Credit Card Processing Loans

  • No restrictions on business loan proceeds
  • A fast and less intrusive approval process
  • Flexible repayment based on sales volume
  • Available to business owners who have been declined by traditional lenders
  • Less focus on credit score and more on business potential
  • Approval for no-, low-, or bad-credit business owners


Disadvantages of Credit Card Processing Loans

  • Higher Annual Percentage Rates (APR) than traditional lenders
  • Can cause future cash flow issues if investment returns are lower than expected
  • No federal oversight as they are considered a commercial transaction rather than a business loan. State laws are applicable
  • Potential to devolve into debt dependency if investment returns are insufficient
  • At-risk to predatory lenders. Perform due diligence on every lender under consideration
  • Confusing contracts. Consult with an appropriate legal or financial professional



Credit Approval Process

  • 1. Complete an online business loan application
  • 2. Provide requested documentation. Typically, 3 – 6 months of credit card processing statements, driver’s license, and business license
  • 3. A high rate of approval: approximately 90% of business loan applicants are approved
  • 4. Review business loan agreement
  • 5. Accept and receive funds within a few days



Alternatives to Credit Card Processing Loans

It’s advisable to investigate more affordable business loan options before committing to Merchant Cash Advances.

Short-Term Bank and Credit Union Business Loans

The first place to visit is your bank or credit union. Bank and credit union short-term business loans generally carry a lower APR. If that doesn’t work out there are alternative business loans available that may have more favorable terms. Another option is a bank line-of-credit to be used only when necessary.

Company Credit Card

A company credit card can help short-term cash flow by delaying the payment by up to 30 days. If payment is made by the due date, no interest is charged. Even those with no-, low-, or bad credit can be approved for an unsecured credit card although interest rates can be significant. But again, if charges are paid by the due date, there are no interest rates.

Gas and Supply Store Credit Cards

Retailers like Exxon, Lowes, and Home Depot offer credit cards to their customers. They can help business owners to defer operating expenses and conserve cash. They may be an option if regular short-term financing is needed. Additionally, paying credit cards on time improves credit scores.

Working Capital Loans

Many alternative business lenders offer short-term working capital loans. Interest rates vary based on cash flow projections and credit score. They’re a form of bridge financing used to fund operations while waiting for customer payments or a projected business upswing.

Customer Invoice Factoring

This type of business financing uses future payments from customers as security for the cash advance. The loan amount is a discounted amount of the face value of the invoices. For example, if you’ve issued $10,000 in invoices, a factoring company may advance you around 80% which is $8,000.

Inventory Loans

It’s estimated that 51% of U.S. business owners take out loans for inventory purchases. For some, it’s to stock up in preparation for a seasonal upswing. For others, it’s to take advantage of discount pricing that results in higher profit margins. The purchased inventory becomes collateral for the business loan should a default occur.



Some Final Words on Credit Card Processing Loans

Credit card processing loans or Merchant Cash Advances are a viable business financing option for some owners under certain circumstances. They are relatively easy to be approved for and the issuance of the loan can happen within a few days. But this option should be used sparingly due to the high cost of borrowing. Minimum qualifications for credit card processing loans is generally $10,000 per month in credit card sales and one year of business operation.

It’s also important to use the cash advance to improve the business creating an investment return that contributes to paying back the loan. Taking on business debt without getting a return-on-investment can result in future cash flow problems and possibly lead to an ongoing cycle of debt.

Merchant Cash Advances and ACH business loans are marginally different, so it’s advisable to get clarity from the lender and make a choice that is best for your circumstances. One of the prime advantages to merchant cash advances and ACH business loans is that there are no restrictions on the use of the proceeds. But be sure there’s solid business logic for the loan.

It’s always advisable to investigate other types of business financing to see if there’s a more appropriate business loan and to weigh the pros and cons of each financing vehicle.

Never sign a credit card processing loan’s contract if you don’t understand the contents. Predatory business lenders use complicated terminology to confuse the borrower. If you don’t understand the contract, have a professional explain it. Once you find a reputable lender then future business loans should be free of complications.

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