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What is Credit Card Factoring?Credit card factoring is a financial arrangement where a business sells its future credit card sales to a third party at a discount in exchange for immediate cash. This provides the business with quick access to funds for operations or growth, but usually comes at the cost of a portion of future sales revenue.To put it bluntly, in most cases, credit card factoring is considered credit card fraud, or more precisely, a type of digital money laundering. If caught, it may even land you with a felony conviction. Credit card scams of this type can destroy companies and lives, because all the risks and consequences are shouldered by the business that allows their merchant account to be used for such a purpose.Short-term financial gains from collecting the credit card processing fees on the transactions may prove to be a complete ruin in the long run. According to the law, engaging in credit card factoring involves presenting a credit card or its details for payment without proper authorization, to defraud the issuing entity, cardholder, or acquiring bank. This act constitutes a Class 5 felony. However, if done without fraudulent intent but lacking authorization, it is considered a Class 1 misdemeanor.Credit card fraud

How Does Credit Card Factoring Work?

Here’s how credit card factoring typically works:

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  1. A business that accepts credit cards (the “client”) sells its future credit card receivables to a factoring company at a discount.
  2. The factoring company advances a lump sum of cash, usually 70-90% of the face value of the receivables, to the client.
  3. As customers make purchases with their credit cards, the card transactions are routed to the factoring company.
  4. The factoring company collects the full amount of the receivables and takes its cut – the difference between the face value and the discounted purchase price. This is the factoring fee.
  5. The reserve amount (the remaining 10-30%) is rebated to the client, minus any chargebacks or refunds.
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So essentially, the business gets immediate cash by selling its future credit card income at a discount. The factoring company profits by collecting the full value later, assuming there are no issues with the transactions.Credit card processing

Is Credit Card Factoring Legal?

The short answer is – it depends. There are legal forms of credit card factoring, but many arrangements cross the line into fraud and money laundering territory.Legitimate Credit Card Factoring (Merchant Cash Advance)A merchant cash advance (MCA) is a legal form of credit card factoring. With an MCA:

  • A business borrows a lump sum of cash from a lender
  • The loan is paid back via a percentage of the business’s daily credit card sales
  • The cost is a factor rate rather than an interest rate (e.g. 1.2 factor rate means paying back $12,000 on a $10,000 advance)

MCAs provide fast funding for businesses that have strong credit card sales but may not qualify for other financing options due to credit issues or limited business history. However, the cost is often very high compared to other types of loans.Illegal Credit Card FactoringAny arrangement where a business runs transactions for another company through its own merchant account is likely illegal factoring. Common scenarios include:

  • Business A has maxed out its own merchant account, so it runs overflow transactions through Business B’s account for a cut of the sales.
  • A scammer obtains stolen credit card numbers and recruits businesses to run the fraudulent transactions through their merchant accounts.
  • A telemarketer processes sales through a different business’s merchant account because the telemarketer cannot get approved for an account.

In these cases, the business that allows its merchant account to be used is considered a “signer” and can face serious consequences, including:

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  • Responsibility for paying back any fraudulent charges/chargebacks
  • Termination of the merchant account
  • Placement on the Match List (blacklist for getting another merchant account)
  • Fines and legal action from the card processor for violating the merchant agreement
  • Criminal charges for fraud and money laundering

So while it may be tempting to earn extra cash by letting someone else use your merchant account, it’s simply not worth the risk. The penalties can easily outweigh the short-term gains.Factoring

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Spotting Credit Card Factoring Scams

If someone approaches you about using your merchant account to process their credit card transactions, that’s a major red flag. Here are some common signs of a credit card factoring scam:

  • A person or company asks to use your merchant account because they can’t get approved for their own
  • They claim their own account is “maxed out” or limited in some way
  • They pressure you to sign up for additional merchant accounts to process their transactions
  • They downplay the risk and say that account terminations are normal and to be expected
  • They promise easy money for letting them use your account

Remember, there’s no legitimate reason for another business to process transactions through your merchant account. Merchant service providers evaluate applicants carefully, and if the company can’t get approved, it’s for good reason – likely a history of fraud or excessive chargebacks. Don’t put your own business at risk by getting involved.Scam alert

Alternatives to Credit Card Factoring

If your business needs funding but doesn’t qualify for traditional loans, there are financing options that don’t involve the risks of credit card factoring:Merchant Cash Advance (MCA)
As discussed earlier, a merchant cash advance is a legal way to borrow against your future credit and debit card sales. The funding is fast and flexible, but be aware of the high cost.Invoice Factoring
With invoice factoring, you sell your outstanding invoices to a factoring company at a discount


. The factoring company advances you a portion of the invoice value and then collects payment directly from your customers. This improves cash flow without taking on debt.Equipment Financing
If you need to purchase equipment for your business, consider equipment financing instead of tying up working capital. The equipment serves as collateral for the loan, so it’s often easier to qualify for than unsecured loans.Business Line of Credit
A business line of credit provides access to funds when you need them, up to a set credit limit. You only pay interest on the amount you borrow, making it a flexible option for short-term needs or unexpected expenses.The key is to work with reputable lenders and thoroughly understand the terms before signing on. Don’t let desperation lead you into a predatory or illegal financing arrangement.Financing options

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How to Protect Your Business from Credit Card Fraud

As a business owner, it’s crucial to safeguard your merchant account from misuse. Here are some best practices to avoid inadvertently facilitating credit card fraud:

  • NEVER allow anyone else to process transactions through your merchant account, even if it seems like a harmless favor for another business.
  • Train your staff on proper credit card handling procedures and make sure they understand the consequences of merchant account misuse.
  • Use a reputable merchant service provider that has robust fraud detection and follows all card brand rules and regulations.
  • Keep your merchant account information secure and never share your login credentials.
  • Monitor your account activity regularly and report any suspicious transactions immediately.
  • If someone approaches you about factoring credit card transactions, cut off contact and alert your merchant service provider. It may be a scam.

Remember, as the merchant account holder, YOU are ultimately responsible for any fraud or chargebacks that occur – even if you didn’t personally process the transactions. Protect yourself by being vigilant and following the terms of your merchant agreement to the letter.Fraud prevention

The Bottom Line on Credit Card Factoring

While credit card factoring may seem like an easy way to boost cash flow, it’s a minefield of legal and financial risks. Legitimate factoring arrangements like merchant cash advances come at a steep cost, while letting others use your merchant account is outright illegal in most cases.If your business is struggling with cash flow, explore funding options through reputable lenders and financial institutions. Don’t jeopardize everything you’ve built by getting mixed up in credit card fraud. The consequences simply aren’t worth it.At the end of the day, protecting your merchant account is protecting your livelihood. By understanding the risks of credit card factoring and taking proactive steps to prevent misuse, you can keep your business on solid ground. Trust your instincts, do your due diligence, and always put the integrity of your business first.

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