What is Credit Card Factoring?

an extreme close-up credit card number

Credit card factoring happens when a merchant account is used for non-merchant-account related transactions.

There are actually two processes that are known as credit card factoring. Traditional factoring is illegal, whereas merchant cash advance factoring is becoming commonplace.

Traditional Credit Card Factoring

How does factoring happen?

Businesses have low sales

If a business has not been able to pull in sufficient sales, then it cannot justify the financial cost or the time commitment to create and maintain a merchant account. When this happens, the business owners may try to conduct transactions through another merchant account.

Illicit activity is being conducted

If business owners are dealing with high risk or potentially illegal operations, they may try to commandeer a merchant account so they can take credit cards for high-cost transactions.

On accident

If a business has gotten too large, they may not realize that certain other expenses within the company may necessitate another merchant account.

Why is credit card factoring illegal?

Factoring is illegal because it could potentially ruin the lives of the merchant account holders along with the lending bank.

For instance, if ABC Company used the merchant account of XYZ Incorporated to run its customers’ credit cards, then ABC Company would be guilty of credit card factoring, but XYZ may be left to pick up the pieces.

Because the third parties are laundering, their transaction information has not been evaluated by the processing bank. If a third party uses a merchant account and there is a tremendous amount of fraudulent activity, the processing bank may have to deal with the consequences. While the third party could walk away without any financial damage, the business who owns the merchant account would be left to handle any of the legal or financial issues raised.

Each business should be checked by a lending service before it is given a merchant account. When the business is properly vetted, it can receive a merchant account and the processor will take on little to no risk.

What happens if any factoring is caught?

Traditional credit card factoring is a felony.

Along with being charged with fraud, any merchants that have factored could be considered high-risk and, therefore, be rendered unable to conduct business. Also, any financial losses that occur must be compensated.

If you find yourself looking at factoring as a real option, don’t.

Instead of using credit card factoring, consider all of your possible options before moving forward. Talk with the team at Authorized Credit Card Systems. There are many options for establishing an affordable merchant account. We can also see if you even need a merchant account in the first place.

Merchant Cash Advance

This other type of credit card factoring turns possible income from credit cards into immediate financial benefits. A business’s lending firm provides the business with a lump sum payment as a cash advance. In exchange, the business contributes a portion of credit card sales to the lender until the lump sum is repaid.

As an example, let’s say a lender loans a business $1,000. In exchange, the lender may ask for $1,500 in credit card sales until the sum is paid off.

A merchant cash advance can benefit business owners who have little income at the moment. A business could afford to strengthen infrastructure and purchase needed tools with a merchant cash advance.

This type of credit card factoring is legal and available for those whose credit may not be well established. A merchant cash advance may also be beneficial for brand new businesses who haven’t been able to establish a record of financial trustworthiness.

One of the disadvantages of a merchant cash advance are the high interest rates. Most businesses can get approved easily for an advance, but they may pay for it in the long run.

Factoring can put your business at risk.

If you want to know more about factoring, merchant cash advances, or anything else credit-related, contact Authorized Credit Card Systems. We can schedule a free consultation with anyone in Austin or beyond and get your business processing in as little as two days.

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