Credit card factoring basics

Getting quick funds that your company needs to operate can be a struggle. Even when you have a thriving business, unexpected expenses can quickly outpace your liquid assets. To obtain cash to cover these expenses, you can either apply for a small business loan which involves an intensive application process, a credit check, and collateral. Or, you can investigate credit card factoring to get money based on your projected future receipts.

What is credit card factoring?

Credit card factoring is a viable financing option if you have an established business which accepts credit card payments. Here’s a brief overview of how it works:

A financing company will examine your monthly average of credit card receipts and use that data to determine how much it will be willing to advance you. Depending on what your receipt average is, it will generally advance you $5,000 to $250,000. These services are not free – you’ll typically sign an agreement where you’ll receive 80% to 90% of the value of your receipts with the remaining percentage going to the factoring company.

Pros and cons of credit card factoring

There are many advantages to using credit card factoring compared with taking out a small business loan. First, the application process is very simple. You don't even need to put together financial reports to supplement your application, and factoring companies typically don’t check your credit history. Second, you usually get an answer within 24 hours instead of several weeks, which is usually how long it takes to be approved for a small business loan. Also, you don't need any collateral beyond your credit card receipts.

While there are many obvious advantages to credit card factoring, there are also a few downsides to be aware of. First, the cash that you are advanced is secured by your future credit card sales. This means that the credit card factoring company owns your future credit card receipts, which can crimp your cash flow if you don't have enough sales to cover the factoring agreement and ongoing operating expenses.

Also, you can end up in a non-stop cycle where you have to continuously use credit card factoring to stay on top of your expenses. Because of this, it’s important that you have a handle on all the numbers involved before venturing into a credit card factoring contract.

Get free price quotes from multiple factoring companies by submitting a free BuyerZone request for factoring quotes. To learn more about how factoring works, read our Factoring Buyer’s Guide.