Credit Card Factoring: How It Works and What It Costs

How it works

A provider advances a lump sum and collects repayment as a fixed percentage of your daily card sales until a set total is paid.

If your card sales rise, you repay faster. If they fall, payments shrink with them. The provider takes the percentage directly from your card processing, often called a holdback. There is no fixed term, but there is a fixed total to repay.

What it costs

Cost is expressed as a factor rate. A 1.3 factor on $20,000 means repaying $26,000, regardless of how quickly you pay.

This is an illustrative example. If you receive $20,000 at a 1.3 factor rate, you repay $26,000, a $6,000 cost. If sales are strong and repayment takes four months, the effective annual cost is far higher than the same dollars over a year. Use what a 1.3 factor rate costs and factor rates explained to compare offers.

Who it fits, and when it does not

It can fit restaurants and retailers with steady card sales and a quick, profitable use for cash. It fits poorly if margins are thin.

Daily holdbacks reduce cash every day. If gross margins cannot absorb a 10% to 20% holdback, the product can drain working capital. Avoid stacking several advances; see the loan stacking guide. Get the full repayment amount in writing.

ROI Funder's closest fit

Revenue-based financing repays as a share of sales, so payments move with revenue, like card factoring but with clear cost shown up front.

ROI Funder places revenue-based financing and working capital. It shows true cost, payback period and monthly-equivalent payments before you sign. A line of credit may cost less if you qualify. It does not offer factoring as such.

Warning signs in an advance agreement

Watch for confession-of-judgment clauses, vague reconciliation rights, hidden fees and pressure to sign the same day.

• No clear total repayment figure
• Holdback you cannot adjust when sales fall
• Large origination or underwriting fees
• Personal guarantees with broad wording
• Restrictions on using other financing

Have an attorney or accountant review it if the amount is large.

Costs compared with other products

Short-term advances often cost more than a line of credit or term loan, so use them for quick, high-return needs.

This is an illustrative example. A $20,000 advance repaying $26,000 over 5 months costs $6,000. The same $20,000 on a term loan with a total cost of $3,000 over 12 months is cheaper, but may take longer to arrange or require stronger credit. Speed has a price. Decide whether the speed earns more than the extra cost. See total cost of a funding offer.

Alternatives to compare before you decide

Compare a line of credit, a term loan, equipment financing and revenue-based financing against the advance.

If you qualify, a term loan or line may cost less. If card sales are your main income and you need quick access, revenue-based financing may fit. If the need is a machine, equipment financing is tied to the asset. Ask each provider for total repayment, payment schedule and fees, then compare monthly-equivalent payments side by side.

Whatever you choose, run the numbers on your slowest month. If the daily or weekly payment would still fit comfortably, the product may be workable. If it would not, look for a smaller amount, a longer term or another option.

How to check the offer before you sign

Ask for the total repayment, the holdback percentage, fees, and what happens if sales fall.

Convert the offer to a monthly-equivalent payment and test it against a bad month. ROI Funder considers 500+ FICO, 6+ months in business and $20,000+ monthly revenue. Applying takes minutes with a soft credit pull and no obligation to accept. Use the offer comparison worksheet.