The Ins and Outs of Credit Card Factoring

What is credit card factoring?

Credit card factoring is a practice where a business uses a merchant account of another business to process credit card transactions.

This could include the following scenarios:

1. A business owner uses a friend’s merchant account to process their transactions. Despite appearing to be a practical solution for businesses struggling with cash flow, this method is considered illegal due to its close resemblance to money laundering.
2. A fraudster with stolen credit card information asks a legitimate business to process credit card transactions for them in exchange for a portion of the proceeds. The business processes the credit card charge and sends the proceeds to the fraudulent company. When the credit card owner identifies the credit card charges as fraudulent, the legitimate business is on the hook for paying the credit card owner back.

Consequences of credit card factoring.

Engaging in credit card factoring can have far-reaching consequences for businesses, both legally and financially. On the legal front, credit card factoring is considered illegal due to its resemblance to money laundering. Businesses found guilty of this practice may face hefty fines and legal ramifications. In severe cases, business owners may even face criminal charges such as fraud, which can lead to imprisonment.

From a financial perspective, if a business falls victim to a scammer, it could be on the hook for thousands of dollars of chargebacks.

To make matters worse, your processor could place you on the Terminated Math File. After this, you would find it almost impossible to acquire a merchant account.

Merchant cash advances vs. credit card factoring.

Credit card factoring is sometimes confused with merchant cash advances, but they are two different things.

A merchant cash advance (MCA) is a legal type of business financing where a company sells a portion of its future credit card sales in exchange for a lump sum of cash up front. This is typically a quick and easy way for businesses—especially those with poor credit or those unable to secure traditional loans—to access needed capital. However, MCAs often come with high factor rates and fees, making them a costly solution over time.

On the other hand, credit card factoring, as previously discussed, is a practice where a business uses another business’ merchant account to process credit card transactions. This is often seen as a workaround for businesses unable to secure their own merchant accounts, but it’s a risky and illegal practice closely resembling money laundering.

Merchant cash advance vs. invoice factoring.

In invoice factoring, you sell your business’ invoices to a third party called a factor. It is then up to the factor to collect the payment from the customer. The factor typically advances 80% to 90% of the value and then provides the rest (minus processing fees) upon receiving payment from the customer.Merchant cash advances, on the other hand, are cash advances secured by your business’ future credit card sales. To do this, a merchant cash advance company gives you upfront cash and then deducts a percentage of your credit card sales each day until the amount is fully paid.

Benefits of a merchant cash advance.

The greatest benefit of a merchant cash advance is the speed and ease with which you can get financed. Many companies can fund your advance in as little as 24 hours and will work with business owners with a credit score of 500 or higher.To learn what works best for your business, you can weigh your cash advance options with other business loan options through Lendio’s free loan match tool.