Unique Business Line of Credit Types
As an alternative to obtaining a traditional business line of credit, there are two types of facilities that use your future earnings or current receivables. A credit card receivables LOC is linked to your merchant account. This type of lender typically refers to this type of credit facility as a “credit card receivables advance.” Typically, this lender provides an advance of up to 2 months of income based on your merchant account usage history. Each time a sale is made, a certain percentage of the sale is deducted from your balance owed to the lender. However, this type of lending is very expense. The interest rates for this type of business loc can range anywhere from 15% to 29% depending on the state’s lending laws.
An accounts receivable business loc is secured by the individuals or businesses that owe you money. In this scenario a lender will look at your receivables, who your customers are, and how long they have owed you money. Based on these factors, these lenders (often called factoring companies) will provide you with a capped line of credit. However, it should be noted that even if your client does not pay – you will still be liable for the money drawn down on the business loc.
As an alternative to this, some lenders will “purchase” your receivables for a discounted rate. For instance, if John Doe owes you ,000 then the lender will buy that receivable from you for 0 to 0. If you decide to sell your receivables to a third party – you need to carefully consider whether or not you can afford to sell your receivables for a substantial discount.