Merchant Financing: What It Is and How to Find It

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Your Ultimate Guide to Merchant Financing

If you’re on the hunt for a small business loan, you’ve likely come across the concept of merchant financing at least once or twice along the way.

What does it mean? And can it fund your business quickly and affordably?

With this guide, we’ll tackle the concept of merchant financing and all the information you need to know in order to decide if merchant financing is the right move for you.

The Rundown on Merchant Financing

First and foremost, we’ll need to cover some fundamental information about merchant financing in order to help you answer the question of what merchant financing is exactly.

Merchant financing is exactly what it sounds like—financing for merchants. It’s a blanket term that refers to any business funding that any business with a merchant storefront—and the credit card processing system a merchant storefront typically requires—can fund with.

Merchant financing is most often used to referred to merchant cash advances, though this umbrella term can refer to any funding type that collects repayment automatically through your credit card processing system.

How Does Merchant Financing Work?

Basically, any merchant financing lender will set up a system for intercepting the money that your business takes in through credit card transactions, and through that system, they’ll take a daily percentage of your transactions as a form of repayment. This will go on until your merchant financing, plus interest, is paid off.

This repayment structure means that on a day when business is good, you’ll be paying more towards your financing. On the other hand, on a day when business is slow, you’ll be paying less towards your financing. Plus, on holidays or any other day when your credit card transactions are a solid $0, you won’t pay any at all.

How will you know how expensive your merchant financing will be if there’s no set repayment length?

Well, because there’s no way to know how long it will take for you to pay off your merchant financing, the cost of merchant financing typically isn’t expressed in the same, time-based APR as other types of business funding. Instead, merchant financing will carry factor rates, which are decimal values that express how much your merchant financing will cost overall.

For instance, if you secure merchant financing of $1,000 at a 1.15 factor rate, then you’ll just multiply 1000 by 1.15 to find out that you’ll ultimately have to pay your lender $1,150 for your merchant financing. Though factor rates on merchant financing products might seem daunting at first, they’re actually a pretty straightforward way to see how much your business funding will ultimately cost you.

    Merchant Financing Terms

    If the features that merchant financing can offer your business sound up your alley, then it’s time to dive into the logistics before you decide to apply.

    Let’s take a look at the terms that merchant financing products typically come with.

    Merchant Financing Loan Amounts

    Generally speaking, merchant financing can range anywhere from $2,500 to $250,000. However, they can certainly reach past this general range.

    Buy and large, if you’re willing to pay extremely high rates, you can find merchant financing for as big as you need. However, if you’re looking for large loan amounts, we’d suggest looking for longer-term, lower rate funding sources.

    Merchant Financing Rates

    As mentioned, merchant financing’s rates won’t be expressed with your typical interest rate or APR. Because merchant financing doesn’t come with a predetermined term length, it will come with a factor rate that tells you how much your loan will end up costing you, regardless of how much time it takes you to pay it off.

    Generally speaking, a typical merchant financing product should come with a factor rate from 1.14 to 1.18. However, many many sources of merchant financing will come with factor rates that are much higher than this. In fact, if translated to a traditional APR, many merchant cash advances’ costs can turn out to be APR’s in the triple digits.

What You’ll Need to Secure Merchant Financing

With all the details covered on what merchant financing can offer, the next step is to take a look at what you and your business need to offer in order to secure merchant financing.

Let’s take a look at the minimum qualifications, along with the documents you need to verify them, that applying for merchant financing will typically require:

  • A personal credit score of at least 500
  • At least 1 year in business
  • At least $50,000 in annual revenue
  • Driver’s License
  • Voided Business Check
  • Bank Statements
  • Credit Score
  • Business Tax Returns
  • Credit Card Processing Statements
See If I Qualify

The Advantages and Disadvantages of Merchant Financing

The Advantages of Merchant Financing

With all of the logistics covered, let’s take a step back to evaluate what all of these details actually mean for you and your business. In order to answer that question, we’ll separate all of the stand out details about merchant financing into the good and the bad.

To start, we’ll go over what exactly makes merchant financing a good solution for some small business’s financing needs.

Here are the 3 main advantages to merchant financing.

    Easy to Qualify For

    First and foremost, one of the main draws of merchant financing is that it is one of the easiest types of business funding to qualify for. As you saw in the minimum requirements that the best types of merchant financing generally require of borrowers, this is a pretty accessible funding option.

    And that’s just the top tier of merchant financing.

    In fact, many merchant financing lenders won’t even consider your—or your business’—credit history. Because merchant financing repayment will be deducted automatically from your credit card processing system, most merchant financing lenders simply want to see that you’re performing a high amount of credit card transactions.

    Automatic Repayment

    Another big draw of merchant financing is its repayment structure—you’ll never have to worry about missing a payment or having an automatic payment bounce. Your repayment will be credit card revenues that you won’t ever touch—it’s basically intercepted by your lender before it reaches your accounts. As such, you won’t have to worry about late fees or rejected payment fees.

    Additionally, this automatic repayment structure that’s simply a daily percentage allows you to repay at your own pace. When business is good, you’ll pay more. When business is slow, you’ll pay less. Simple as that.

    Low Total Cost of Capital

    Finally, merchant financing, as a short-term form of financing, has one last fundamental advantage it offers small businesses—its low cost of capital.

    Because you’re making daily payments towards paying off you merchant financing, you’re more than likely going to pay it off quickly. And lenders know that, so they aren’t charging you large amounts of interest, as your loan will probably reach maturity within the year, if not much quicker.

    Longer-term financing, on the other hand, will have less frequent, often monthly, payments, and will take much longer to reach maturity as a result. As such, long-term loans will accumulate much more interest, and will end up costing you much more in the long run.

    With merchant financing, you might be making high daily payments in order to pay off your financing quickly, but you’re ultimately paying less for the financing because of that.

The Disadvantages of Merchant Financing

Now that you know what merchant financing has going for it, let’s round out its review by taking some time to consider its downfalls.

Let’s take a look at some of the reasons that you might hesitate on funding your business with merchant financing.

    Though your payments will ebb and flow with how much business you do each day, they will still happen every single day that you do business.

    This means that every single day, a percentage of your business’s revenue will go towards repaying your merchant financing, which can really stifle your small business’s cash flow.

    If daily repayments are daunting, try looking into loan options that are repaid through weekly, or even monthly, repayments.

    At the end of the day, you’ll need to decide whether you want to prioritize the less frequent payments that longer-term financing offers or the lower cost of capital that merchant financing can offer.

    Short Repayment Terms

    Though there won’t be a determined repayment term length for your merchant financing, your lender will expect it to be repaid quickly. And the daily percentage of your business’s credit card revenues will be accordingly large.

    All in all, if you’re worried about being able to manage large, frequent payments, look into a longer-term form of business financing like a business line of credit or a term loan.

    Yet again, you’ll have to make a decision between the lower payments that longer-term financing provides versus the lower cost of capital—but much higher payments—that merchant financing often comes with.

Which Lenders Offer Merchant Financing

With all the ins and outs of merchant financing laid out at your fingertips, you have all of the necessary information to decide if it’s the right funding fit for your business.

If you like what you see so far, the next move is to consider where you’ll find your merchant financing. While some purely lending-based companies can provide merchant financing, many credit card issuers and processing companies have moved into the market of merchant financing, as well. As such, you’ll probably see a lot of familiar names in your search for merchant financing companies. Who knows, you might have come across the term “merchant financing through a pre-approved deal from a company you already work with in some other capacity.

Here are some of the top companies on the market offering merchant financing:

And those are just a few of the many companies vying to provide your business an advance for a future percentage of its daily credit card revenues.

See If I Qualify

Thinking Next Steps if Merchant Financing Isn’t the Right Fit

On the other hand, if you’ve gotten all of the information on merchant financing, and you’ve decided it’s not the right fit, you’re going to need to think next steps.

Based on merchant financing’s downfalls—like high rates and short terms— we’ve narrowed down some alternative funding sources that address these disadvantages.

Let’s take a look at two types of funding that are often much more affordable than merchant financing.

A Lower-Rate Alternative to Merchant Financing: Short-Term Loans

First, look into a go-to alternative to merchant financing, the short-term loan.

Just like merchant financing, the short-term loan is relatively easy to qualify and comes with a pretty low cost of capital.

That said, short-term loans will often come with lower rates, along with weekly—instead of daily—payments.

Here are the details on this merchant financing alternative.

    Terms for Short-Term Loans

    Generally speaking, short-term loans will come with the following ranges of terms:

    • Loan amounts from $2,5oo to $250,000
    • Repayment term lengths as short as 3 months and as long as 18 months
    • Interest rates that start as low as 10%

    Requirements for Short-Term Loans

    In order to access short-term loans, borrowers will generally need to fulfill the following minimum requirements:

    • A personal credit score of at least 550
    • A minimum of 1 year in business
    • At least $50,000 in annual revenue

    Additionally, you’ll likely need to provide the following paperwork during the application process for a short-term loan:

    • Driver’s License
    • Voided Business Check
    • Proof of Ownership
    • Bank Statements
    • Credit Score
    • Personal Tax Returns

    Funding Speed for Short-Term Loans

    Finally, one definite leg up that short-term loans will have on merchant financing is the speed at which they tend to be funded. Where as merchant cash advances tend to take more than a week to fund, your business can get funded with a short-term loan in as little as a single day.

A Longer-Term Alternative to Merchant Financing: Term Loans

If you’re looking for less-frequent, more affordable payments, then we suggest looking into an even longer-term form of funding—the term loan.

With lengthy repayment terms, low APR’s, and large loan amounts, term loans offer some of the very best terms that a small business can secure.

Let’s take a look at the numbers.

    Terms for Term Loans

    Looked at generally, term loans are able to offer small businesses the following ranges of terms:

    • Loan amounts from $25,ooo to $500,000
    • Repayment term lengths from 1 to 5 years
    • Interest rates that start as low as 7%

    Requirements for Term Loans

    As far as qualifying goes, term loans are unfortunately some of the hardest business loans to qualify for. That said, with a market full of alternative lenders looking to work specifically with small businesses, you shouldn’t rule this option out as a possibility.

    Buy and large, if you fulfill the following minimum qualifications, then you have a chance at qualifying for a term loan:

    • A personal credit score of at least 600
    • A minimum of 1 year in business
    • At least $90,000 in annual revenue

    If you plan on entering into the application process for a term loan, then it will be prudent to gather the following paperwork ahead of time:

    • Driver’s License
    • Voided Business Check
    • Bank Statements
    • Balance Sheet
    • Profit & Loss Statements
    • Credit Score
    • Business Tax Returns
    • Personal Tax Returns

    Funding Speed for Term Loans

    Last but not least, even these longer-term loans can fund faster than merchant financing—that’s right, if you qualify, you’ll be able to get a term loan in your business’s account in as little as 2 days.

The Bottom Line on Merchant Financing

There you have it—all you need to know, and then some, on merchant financing.

If you decided that this is the right funding source for your business, congratulations! The next step forward is to apply to your chosen merchant financing provider and go from there.

If merchant financing doesn’t seem like the right fit, that’s okay. At the end of the day, merchant financing can really choke up a small business’s cash flow, and looking to longer-term, lower-rate funding before taking on merchant financing is probably a smart idea. For you, the next step forward is to explore your more affordable options, and that’s exactly what we’re here for.

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Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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