November 26, 2019 | Last Updated on: August 3, 2023
Credit card receivables are defined as revenue generated via customer credit cards for which the monies have not been transferred to the merchant from the credit card processor. In addition, for the purposes of cash advances, credit card receivables also are defined as future (anticipated) revenue from a company’s sales. Studies show that credit card sales remain relatively consistent and can be conditionally forecast. Based on the historical track record of cred card sales, a company may borrow money against that future cash flow. For many small business owners, especially recently opened businesses, there is an overwhelming amount of business financing options. For businesses that don’t qualify for longer term financing, it’s essential to know the pros and cons to each type of short-term financing solutions. While these short-term financings come at a higher cost to business owners, if used in the appropriate situations they can help business during a period of low sales volume, with cash flow needs, and much more. Some of the most common short-terms financing options include invoice factoring, accounts receivable financing, credit card receivable financing, and a business line of credit. This article focuses on credit card receivables and how you can use them to finance your short-term business needs.
Also known as a Merchant Cash Advance or credit card factoring, credit card receivables financing is technically not a loan; instead, it’s an advance payment against future income. Credit card receivables financing occurs when financiers purchase a percentage of a business’ future credit card sales at a discounted rate. Essentially, it’s a way to get immediate cash flow based on your future accounts receivable from credit cards or other business receipts. The financier will send a lump sum to the business, which is then paid back by an agreed upon set percentage of future receivables. Once setup, these payments can be made automatically through your credit card processor until the advance and its fees are repaid. There’s really no such thing as a late payment because there is no set term.
Also known as the “holdback” rate, the retrieval rate is the percentage you pay back to your financier on top of the initial advance. Typically, this is anywhere from 5 to 20%, but depends on various factors including the size of the advance, your business’ credit worthiness, your past 3 to 6 months of credit card transactions, and more.
Let’s use an example. Say you own a restaurant and you need to purchase new supplies but don’t have the cash. You’ve only been open for 6 months so you can’t receive typical long-term business financing and you don’t have the time to wait either. Let’s say you need to borrow $20,000 to purchase these supplies, credit card receivable financing allows you to receive the $20,000 up front, and agree to repay the $20,000 plus a fee ($2,000 to $10,000, depending on the factor rate) with a percentage off credit card sales until the total amount is repaid.
Credit card receivables financing is best for new businesses who don’t have credit history, businesses that have bad credit, or any business that can’t find alternative SBA loans or small business loans. Compared to regular short-term loans, the cost of capital can be much higher. Typically, receivable financing is meant to provide immediate working capital, satisfy pressing business needs, and establish something similar to a business line of credit. Ultimately, the long term goal of receivable financing is to build up your credit score and credit history to open the door to more affordable financing for long-term growth.
To sum it up, businesses should use credit card receivable financing in 2 scenarios:
