Merchant financing, at a glance
- Lump sum funding based on card sales.
- Repaid as a percentage of your daily or weekly transactions.
- Fast approval in as little as one or two days.
- Expensive with APRs that can reach over 100%.
- Best used as a last resort.
Merchant financing promises easy approval and fast cash — sometimes in as little as a day. For businesses with strong credit card sales, this speed may be tempting. But that convenience comes at a steep cost. Because merchant financing is typically one of the most expensive ways to borrow, it’s best considered as a last resort.
What is merchant financing?
Merchant financing is a type of funding in which a company gives you a lump sum of cash that you repay with your debit and credit card sales, plus a fee.
Although merchant financing is sometimes used interchangeably with “merchant cash advance,” a merchant cash advance is actually one type of merchant financing.
Merchant financing usually comes in two forms:
- Merchant cash advance (MCA). With an MCA, a financing company purchases a portion of your future receivables and collects repayment as a percentage of your daily or weekly card sales. MCAs are typically offered by independent financing companies.
- Payment processor financing. Some payment processors — such as PayPal, Square, Stripe — offer funding to businesses that use their platforms. Repayment is automatically deducted from transactions processed through that system.
How much do you need?
We'll start with a brief questionnaire to better understand the unique
needs of your business.
Once we uncover your personalized matches, our team will consult you
on the process moving forward.
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 company 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 deciding factor.
2. Receive funding. Merchant financing can usually be available within a day or two.
3. Start repayment. The merchant financing company will set up a system for intercepting the money that your business takes in through card transactions. It may take automatic payments from your business bank account or deduct directly through your payment processor account. Through that system, it’ll take an agreed-upon daily (or weekly) percentage of your transactions for repayment.
4. Pay off the borrowed amount, plus fees. Even with daily or weekly 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.
Merchant financing example
Here’s what that might look like in practice:
- You borrow $20,000.
- Your factor rate is 1.2.
- Your total repayment is $24,000 (1.2 x $20,000).
- You average $2,000 in daily sales.
- The financing company collects 10% of your daily sales ($200 per day).
- You’ll repay the advance in about 120 days ($24,000 / $200).
In this scenario, you’ll be paying a total of $4,000 in fees over approximately four months. You’ll make larger payments on days with higher sales and smaller payments on slow days.
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%.
Best merchant financing options
| Product | Max loan amount | Min. credit score | |
|---|---|---|---|
 Giggle Finance - Merchant cash advance with NerdWallet Small Business | $15,000 | 300 | with NerdWallet Small Business |
 Expansion Capital Group - Merchant cash advance with NerdWallet Small Business | $300,000 | 500 | with NerdWallet Small Business |
 Forward Financing - Merchant cash advance with NerdWallet Small Business | $500,000 | 500 | with NerdWallet Small Business |
 Uplyft Capital- Merchant cash advance with NerdWallet Small Business | $500,000 | 475 | with NerdWallet Small Business |
 PayPal Working Capital Loan with NerdWallet Small Business | $300,000 | 300 | with NerdWallet Small Business |
 Square - Business loans with NerdWallet Small Business | $350,000 | 300 | with NerdWallet Small Business |
 Shopify Capital - Merchant Cash Advance | $2,000,000 | 300 |
Pros and cons of merchant financing
Pros
- Easy to qualify for. Many merchant financing companies don’t focus on your personal or business credit history. Instead, they’ll prioritize 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.
- Fast to fund. You can usually get financing within one to two days, which is ideal if you need cash quickly.
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.
- No federal regulation. Because this type of financing isn’t technically a loan, it’s not subject to federal regulation. As a result, some predatory companies try to take advantage of small-business owners by using misleading marketing and aggressive sales tactics.
Should you use merchant financing?
Merchant financing may make sense if:
- You can’t qualify for traditional business loans.
- You need funding within 48 hours.
- You have strong daily card sales.
You should consider other options if:
- You qualify for more affordable financing (bank, SBA or even online loan).
- You can wait to get funds.
- Your business isn’t generating enough revenue to cover regular expenses.
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 business loans
Online small-business loans often ask for a preliminary application, 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
Headway Capital Headway Capital - Line of credit
Max Loan Amount
$100,000 With the Headway Capital line of credit, you can make weekly or monthly payments not daily ones. You can qualify with an annual revenue of at least $50000, a credit score of 625 and 6 months in business.
If you want a longer repayment period
OnDeck OnDeck - Online term loan
Max Loan Amount
$400,000 OnDeck offers a loan with terms of up to 24 months, which may be longer than common merchant financing options. You’ll still have to make weekly or daily repayments, though.
If you have bad credit
Fora Financial Fora Financial - Online term loan
Max Loan Amount
$1,500,000 Fora Financial offers working capital loans to business owners with credit scores of 570 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 tend to have low interest rates compared with other types of financing. Terms on microloans can stretch as long as seven years.
U.S. Small Business Administration SBA microloan
Max Loan Amount
$50,000 SBA microloans are a good choice for businesses that:
- Can’t qualify for bank or other SBA loans.
- 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.
