What Is Loan Against Card Receivables

 A loan against card receivables is a type of financing arrangement where a business borrows funds using its future credit or debit card sales as collateral. This type of loan is typically offered to businesses that accept card payments from customers, such as retailers, restaurants, or service providers.

Here's how a loan against card receivables typically works:

  1. Application Process: The business applies for the loan with a lender, providing details about its card sales volume, transaction history, and other financial information. The lender evaluates the business's creditworthiness and assesses the potential risk based on its card receivables.

  2. Loan Amount: The lender determines the loan amount based on a percentage of the business's average daily card sales. This percentage can vary depending on factors such as the lender's policies, the business's credit profile, and the industry.

  3. Repayment Structure: Instead of making fixed monthly payments like with a traditional term loan, repayment of a loan against card receivables is typically structured as a percentage of the business's daily card sales. This repayment structure is known as a "daily or weekly sweep" or "split withholding." The lender automatically deducts a predetermined percentage of the business's card sales each day or week until the loan is fully repaid.

  4. Collateral: The primary collateral for the loan is the future card receivables of the business. Since the lender has visibility into the business's daily card sales through its merchant processing account, it can secure the loan based on the anticipated revenue from these transactions.

  5. Interest Rate and Fees: The loan against card receivables may have a higher interest rate compared to traditional loans due to the higher risk involved for the lender. Additionally, the lender may charge fees such as an origination fee or a daily withholding fee.

  6. Term and Renewal: The term of the loan against card receivables can vary, but it is typically shorter than traditional term loans. Once the loan is repaid, the business may have the option to renew or apply for additional funding.

Overall, a loan against card receivables provides businesses with access to working capital based on their future card sales, offering flexibility and convenience, albeit at potentially higher costs compared to traditional financing options.

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