Credit card receivable financing (CCRF) – as an alternative funding option for small business is growing in popularity and – for a lot of good reasons. However, some business owners still confuse (CCRF) with merchant cash advance (sometimes called business cash advance or cash advance) which is the “more well known” of the two funding options simply because merchant cash advance (MCA) has been available longer and has been heavily marketed by credit card processing sales people for years while CCRF is still relatively new.
It’s true that there are similarities in how the loans are repaid and how a business qualifies for them, but there are also characteristics that have to be explained because the benefits each offer are different in how they might impact a business and the reason for selecting one over the other.
Credit card receivable financing is actually a type of accounts receivable financing, which uses a merchant’s cash flow from future “credit card sales” to repay the loan instead of the “typical” Accounts Receivable, Invoice or Purchase Order Financing. CCRF is governed by usury laws, and is reported to credit agencies. CCRF is structured as a true, regulated loan, which explains why it is a less expensive option than Cash Advances. And as such it can have a positive impact on credit scores.
To repay the loan, debits – (a small fixed percentage, usually 10-20%) are automatically taken from each future credit card transaction, meaning there is no need to write a check for payments and future credit reports from this loan show a consistent history of on time payments. There will also be no late fees or missed payments to worry about.
Business owners often prefer CCRF over MCA because, as a loan, it offers these benefits in addition to a “funding rate” that is typically 50 to 80% less than a Cash Advance. The term “funding rate” is used instead of interest because it is not the typical “APR type of interest” that is calculated over the length of the loan, etc., but a fixed percentage that is added to the loan and to be paid back in addition to the amount that is borrowed.
Another benefit to CCRF is that it is not always necessary that the merchant switch processing services in order to get the funds as is the case with most MCA. So, if a business qualified for the CCRF it is probably going to be the owners first choice – however, as mentioned previously both are excellent choices as alternative financing when a business does not qualify for a traditional loan due to length of time in business, less than perfect credit, lack of collateral or not meeting other bank requirements.
Merchant Cash Advance (MCA) or Cash Advance loans for years have been used when small and mid-sized businesses like restaurants and retailers needed “short-term” working capital loans to expand, remodel, advertise or for other business improvements. These “loans” have been available to business through processing companies when a bank loan was not an available option due to the borrower not meeting requirements of the lender. You will notice the quotation marks when mentioning loan because a MCA or Cash Advance is technically a “purchase” of the merchants future credit card sales so the lender has some security that the “purchase/loan” will be repaid, usually over a 6 to 12 month term, by debiting a percentage of future credit card sales until the loan is paid off. With MCA the amount debited is not necessarily a “fixed” percentage and can fluctuate based on criteria established by the lender.
For a company that accepts credit cards as payment for their product but is unable to qualify for financing through “traditional” lenders, CCRF and Cash Advances are an excellent alternative with CCRF being the less expensive option.
The CCRF does have more requirements that the merchant must meet in order to qualify which explains why it is usually 50-80% less than MCA. However, the basic requirements for each are just about the same. In both cases the applicant can be approved in 24-48 hours, funding can be in as little as 5 days and funds are wired into the merchant’s business bank account. The qualifications are:
A company must be in business at least one year
Has accepted Visa/MC as payment for their product/service
Has processed a minimum of $3000 in Visa/MC per mo. for past six mos.
Has no open bankruptcies, foreclosures or liens
Has a minimum FICO score of 500 or higher
Is current on mortgage and commercial lease
Has at least one year remaining on business lease or owns the property
Businesses, particularly retailers, auto repair shops, restaurants or merchants that take credit cards as payment and who do not qualify for traditional funding options can look to CCRF or MCA as a viable alternative for short-term working capital.
This option is especially important in today’s economy with many banks unwilling to lend and retailers seeking inventory or marketing capital for the holiday inventory or promotional needs.