Merchant Financing: What It Is and How to Find It

Merchant financing is a type of small-business loan provided by a payment processor or lender. It can be expensive.
Rosalie Murphy
By Rosalie Murphy 
Edited by Ryan Lane

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Merchant financing refers to small-business loans for companies with physical or virtual storefronts that accept credit or debit card payments. In general, a merchant financing lender offers you a lump sum of funding and then collects a percentage of your card sales until that loan is paid back.

Merchant cash advances are the most common type of merchant financing, though this term can refer to any funding type that collects repayment automatically through your payment processing system.

Merchant financing may make sense if your business can’t qualify for other options, but NerdWallet recommends turning to this financing only as a last resort because of the high cost of capital. Explore alternatives, like business credit cards and online business loans, before borrowing this way.

How does merchant financing work?

  1. Apply for funding. How much merchant financing you qualify for depends on your sales history — the more you sell, the more a merchant financing lender will likely be willing to lend. You can borrow as little as a few thousand dollars and as much as six figures. In general, your credit score isn’t a factor.

  2. Receive funding. Merchant financing can usually be available within a day or two.

  3. Start repayment. Your merchant financing lender will set up a system for intercepting the money that your business takes in through card transactions. Through that system, it’ll take an agreed-upon daily percentage of your transactions for repayment.

  4. Pay off the borrowed amount, plus fees. Even with daily payments, it can take time to fully repay the amount you’ll owe. On days when business is good, you’ll pay more toward your balance. But on slow days, you’ll pay less.

How much does merchant financing cost?

Merchant financing costs are determined by decimal values known as factor rates. To calculate how much you’ll owe, multiply the rate by the amount you’re receiving. For example, if you secure merchant financing of $1,000 at a 1.15 factor rate, you’d repay $1,150.

Most types of business funding use annual percentage rates, or APRs, to express interest, which can make it difficult to compare merchant financing costs with other options. Using a tool like a merchant cash advance calculator can estimate an APR for your financing.

For instance, let’s say you repay that $1,150 owed with 2% of your sales, which average $1,000 daily. It would take you roughly two months to cover that amount, making the estimated APR for that debt more than 188%.

Merchant financing lenders: Explore your options

The following payment processors offer merchant financing to businesses that use their services. Note that American Express business loans previously included merchant financing, but new applicants are not being accepted.

PayPal

PayPal Working Capital is merchant financing that collects repayments from your PayPal transactions. You’re eligible once you’ve had a PayPal Business or Premier account for 90 days or more, as long as your annual sales top $15,000 with a Business account or $20,000 with a Premier account. You can choose what percentage of those sales you’d like to put toward repayment. Read NerdWallet’s review of PayPal Working Capital.

Square

Square sellers can apply for up to $250,000 in merchant financing through the payment processor. A percentage of your credit card transactions is collected daily to pay down your balance. You’ll generally need to process $10,000 per year or more in payments to be eligible for financing. Read NerdWallet’s review of Square business loans.

Stripe

Stripe automatically offers merchant financing to sellers that qualify for it, as long as they’ve been using Stripe for at least six months. How much financing you qualify for and what fees you pay depend on your sales history, but you’ll have to repay your loan within 18 months.

If you don’t work with a payment processor that offers merchant financing, there are many independent merchant cash advance companies as well.

Pros and cons of merchant financing

Pros

  • Easy to qualify for. Many merchant financing lenders don’t even consider your personal or business credit history. Instead, they’ll focus on your sales history.

  • Automatic repayment. You don’t have to worry about missing a payment because the funds are withdrawn directly from your credit card transactions.

  • Repayments are based on your sales. If you have a slow season, your repayments will shrink accordingly.

Cons

  • Costly capital. Though it can be difficult to compare merchant financing with other small-business loan products, this debt can be significantly more expensive than other types of business loans.

  • Constant repayments. Every time you make a sale, a percentage of your revenue will go toward your merchant financing. This can stifle your cash flow and potentially lead to a cycle of debt in which you have to keep borrowing to pay off what you owe.

  • Requires you to rely primarily on one type of payment. Merchant financing is typically based on your sales processed through a specific payment processor. If you take payments via another source, like cash or ACH transfers, those aren’t considered in your financing application.

  • Short terms. Merchant financing lenders won’t let you draw repayments out indefinitely. If you don’t have enough revenue to repay your lender in a certain amount of time, you may have to make payments another way.

Alternatives to merchant financing

If you’ve been in business for at least a year and have fair credit, you may be able to qualify for a business loan or business line of credit. Generally speaking, these products cost less and may offer longer terms than merchant financing.

Online small-business loans

Online small-business loans often ask for a preliminary application online, which allows you to find out whether you’ll qualify for financing without a hard credit inquiry. In general, once you submit your full application, these loans can fund within days.

Specifically, consider these options as alternatives to merchant financing:

  • If you want to make less frequent repayments: With Kabbage’s line of credit, you’ll need to make only monthly payments, not daily or weekly ones. You can qualify with $3,000 or more in average monthly revenue, which is more than most merchant financing providers require but less than that needed for other business loans.

  • If you want a longer repayment period: OnDeck offers a loan with terms of up to two years, which is six months longer than the maximum terms for Stripe Capital. You’ll still have to make weekly or daily repayments, though.

  • If you have bad credit: Fora Financial offers working capital loans to business owners with credit scores of 500 or higher. But like with merchant financing lenders, Fora Financial’s fees are based on a factor rate instead of an APR. The company also offers merchant cash advances.

SBA microloans

If you want to borrow $50,000 or less, SBA microloans may be a good option. These loans are made by community-based nonprofit lenders and backed by the U.S. Small Business Administration, and they tend to have low interest rates compared with other types of financing. Terms on microloans can stretch as long as seven years.

SBA microloans are a good choice for businesses that:

  • Want the lowest possible interest rate.

  • Want a long repayment term.

  • Don’t need funding immediately.

Business credit cards

Business credit cards help companies bridge cash flow gaps as needed. You can put day-to-day purchases on a credit card up to your credit limit and pay it back as you’re able, paying interest on only what you use.

Business credit cards are a good choice for businesses that:

  • Aren’t sure how much financing they need.

  • Have been in business for less than a year.

  • Don’t have enough revenue to qualify for merchant financing or a business loan.

A version of this article originally appeared on Fundera, a subsidiary of NerdWallet.