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What Is Merchant Financing?…

Merchant financing is a short-term working capital for business owners that accept credit card transactions. Credit card processing companies offer this financing, and they base loan amounts and repayment terms on a business’s credit card receivables, similar to a merchant cash advance. Merchant financing has high costs, low minimum requirements, and quick funding speeds.

What Merchant Financing Is

Merchant financing is an advance that credit card processors provide against credit card receivables. Business owners use it for short-term financing to cover unexpected expenses and small investments. Merchant financing providers offer similar rates, terms, and qualifications to the best merchant cash advance providers, which can work with almost any credit card processing service.

How Merchant Financing Works

Merchants that accept credit card payments sometimes need short-term financing to cover expenses. While there are multiple financing options and merchant cash advance alternatives, business owners sometimes can’t qualify for other options. If they can’t find financing from another source, they may get merchant financing from their credit card processing provider.

Merchant financing providers offer loans at predetermined factor rates. Businesses don’t make payments like a traditional financing option, instead, the credit card processor deducts a daily fee from credit card receivables known as a holdback percentage. The total that a business must repay is equal to the loan amount times the factor rate. For example, a $20,000 loan with a 1.2-factor rate has a total repayment of $24,000.

Every day the merchant financing provider deducts a set percentage of settlements until the business repays the loan. This gives business owners that earn variable revenue some flexibility because a slow week results in lower payments. However, businesses with growing revenue that repay an advance early increase their financing costs unless they refinance the merchant cash advance.

Who Merchant Financing Is Right For

Merchant financing is rarely the best choice and is typically used by business owners as a last resort for financing if they have high credit card receivables and cannot qualify for other financing options. The low minimum qualifications improve a company’s ability to qualify and the flexible repayment terms make it a good financing option for businesses with unpredictable or seasonal revenues.

Businesses that merchant financing is right for include:

  • Businesses with high credit card receivables: The amount of money a business can access through merchant financing depends on its credit card receivables. Companies with a high credit card transaction volume can receive the most capital.
  • Business owners with low personal credit scores: Most merchant financing providers do not rely on personal credit score as a primary qualification criterion. This makes it more accessible to business owners that need a bad credit business loan.
  • Companies with unpredictable revenues: The payments for merchant financing depend on the daily credit card receivables. Business owners that worry about making a set payment every week because of inconsistent revenue may find the flexibility appealing.
  • Seasonal businesses: An ice cream shop or other seasonal business may rely on a merchant cash advance because of its flexible repayment terms. Traditional lenders shy away from seasonal businesses because most of their revenue is unpredictable.

The primary requirement for merchant financing is working with a credit card processor like Square or American Express that offers a direct financing solution. Business owners that believe it’s a good fit can also work with a merchant cash advance provider. While most processing companies don’t offer financing, a merchant cash advance works the same way.

Merchant Financing Costs

The factor rate quotes by merchant financing companies can be deceiving. In fact, when converted into an APR, this financing option can exceed 150%, leaving business owners with repayment costs that are higher than any other option. For this reason, while merchant financing is an option, it should always be an option of last resort for small business owners.

Merchant financing costs include:

  • Factor rate: 1.1 to 1.5 times the loan amount
  • Estimated APR: 30% to 150%
  • Additional fees: None

Borrowers can calculate their merchant financing costs and the total repayment of merchant financing by multiplying the factor rate by the loan amount. A $10,000 loan with a factor rate of 1.1 results in borrowers needing to repay $11,000 to the lender. The short repayment terms result in a high APR and business owners should consider alternatives to merchant cash advances before applying. Most lenders don’t charge business owners additional fees.

Merchant Financing Terms

Merchant financing terms include:

  • Loan amount: $250,000 to $2 million
  • Holdback percentage: 8% to 15%
  • Repayment term and schedule: Up to 24 months of daily payments
  • Collateral: Blanket UCC filing
  • Personal guarantee: Required
  • Speed to funding: Two to three business days

Credit card processing companies that offer merchant financing withhold a percentage of daily sales called a holdback percentage. They base this on total revenue, so business owners must account for any taxes and tips that business owners put on their credit cards. The repayment terms are an estimate because high revenues can cause loans to be repaid earlier or later than anticipated.

Merchant Financing Qualifications

Merchant financing qualifications include:

  • Credit score: At least 500
  • Time in business: At least three months
  • Annual revenue: At least $36,000

The low minimum requirements of merchant financing are part of the appeal for small business owners. While some providers require a minimum credit score, some have no stated minimum. Providers put an emphasis on receivables and will fund business owners with a short operating history and low revenue.

Pros & Cons of Merchant Financing

Merchant financing is an option for business owners needing quick funding with low minimum qualifications and flexible repayment terms. However, it also has high costs, inflexible repayment terms, and has no prepayment benefit. Business owners should be comfortable with the drawbacks and exhaust their other options before applying.

Pros of Merchant Financing

Pros of merchant financing include:

  • Low minimum requirements: A low credit score, time in business, and annual revenue requirement make merchant financing accessible to business owners that struggle to qualify for other options.
  • Quick funding speeds: Although there are same day business loans that merchants can consider, merchant financing can provide funding in two to three days.
  • Flexible repayment terms: With no set daily payment merchants with variable revenue need not worry about meeting weekly or monthly payments. Merchant financing offers the flexibility of revenue-based payments that seasonal and unpredictable businesses can benefit from.

Cons of Merchant Financing

Cons of merchant financing include:

  • High costs: With starting APRs of 30% and top APRs exceeding 150%, merchant financing is an expensive short-term funding option. Business owners should review their offers and shop around for the best rates.
  • No control over repayment speed: Merchant financing providers require small business owners to make daily payments as a percentage of credit card receivables. This leaves business owners with little control over the size of daily payments and the speed with which they repay the loan.
  • No prepayment benefit: Business owners that borrow with merchant financing may repay the loan amount early. However, the factor rate means that small business owners won’t receive a prepayment benefit and the total loan is due regardless of when they repay it.

Merchant Financing Providers

Business owners seeking merchant financing should work with their credit card processing company. American Express offers financing to small business owners and Square Capital works with businesses that use Square POS systems. National Funding offers merchant cash advances that work with sever credit card processing companies, which is a good consideration for business owners that are shopping around for rates.

Merchant financing providers include:

American Express Merchant Financing

American Express offers a merchant financing solution that’s unique because it has low rates, long repayment terms, a prepayment discount, and large loan amounts. However, business owners must meet rigorous criteria similar to a traditional loan to qualify. Applicants that receive approval can borrow up to $2 million with a starting factor rate of 1.0175 times the loan amount and repayment terms up to 24 months.Square Capital

Square merchants can qualify for merchant financing from Square Capital to borrow up to $250,000 with a starting factor rate of 1.1 times the loan amount. Business owners need not complete an application because Square Capital will provide an offer to qualifying businesses through the Square POS terminal.

National Funding

National Funding offers a merchant cash advance that works with most credit card processing companies. While this means it isn’t merchant financing, business owners should explore their options and compare rates with a third party. It offers funding up to $250,000 with repayment terms up to 18 months and a starting factor rate of 1.1 times the loan amount.

Alternatives to Merchant Financing

Business owners seeking short-term financing may worry that the rates, repayment terms, or funding speeds of merchant financing don’t match their business. Businesses can work with business loan brokers to get help in finding the right financing product and lender. There are also short-term business loans that business owners can qualify for.

Alternatives to invoice financing include:

Business Loan Brokers

The best business loan brokers work with small business owners to understand the nature of their short-term working capital needs and help them find a lender. Although many of these brokers charge a fee for their services, they save business owners significant time and effort when applying.

Short-term Loans

Short-term loans are a good merchant financing alternative for small business owners. Business owners struggling to meet minimum qualifications can get a bad credit business loan. These financing options are expensive compared to traditional loans, but they offer better terms and rates than merchant financing providers.

Invoice Financing

Invoice financing or accounts receivables financing offers small business owners short-term working capital based on the value of outstanding invoices. Accounts receivable financing companies have flexible repayment terms, offer funding quickly, and have low minimum requirements, so business owners considering merchant financing may qualify.

Merchant Financing Frequently Asked Questions (FAQs)

Merchant financing is a common financing solution for businesses that accept credit card payments. Every financing scenario is different and lenders change their rates and requirements frequently. We answer the questions that business owners ask about merchant financing most frequently below and invite readers to post their questions on the Fit Small Business forum.

Is merchant financing legal?

Merchant financing is legal, but it is less regulated than other financing products. This financing product services a specific niche of small business owners with poor personal credit, high credit card revenue, and inconsistent earnings. Business owners should always consider other options before getting merchant financing.

How much does merchant financing cost?

The immediate cost of merchant financing is the factor rate, which lenders multiply by the loan amount to produce total repayment. However, the APR of merchant financing varies depending on the holdback percentage, daily credit card receivables, and the repayment term. Business owners should expect disclosure from lenders with their financing offers.

Bottom Line

Merchant financing is short-term funding for businesses that accept credit card payments. Credit card processing companies offer it to small business owners and it has high rates, flexible payments, and low minimum requirements. Business owners will be better off with different financing options and should turn to merchant financing as a last resort.


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