When small business owners need fast access to capital, point-of-sale (POS) financing can seem like a no-brainer. With funds deposited in days and repayments tied directly to daily sales, this type of funding offers speed and simplicity that traditional loans often lack.
However, while the convenience is appealing, POS financing can carry hidden costs and restrictions that catch many borrowers off guard. Before you sign on the dotted line, it’s important to understand how it works — and whether it’s the right fit for your business.
Understanding POS Financing
These small business loans are provided by companies that offer point-of-sale (POS) and payment processing services. They’re typically a form of merchant cash advance (MCA) or revenue-based financing, where repayments are automatically deducted from your daily credit and debit card sales.
Here’s how it works: The POS company provides a lump sum of capital to the small business upfront. (This is not technically a “loan” in many cases, but rather an advance on future sales.) Then payments are collected as a percentage of your daily card sales directly from your POS system. Repayments happen automatically each day based on your actual sales volume. Common repayment rates range from 5% to 20% of daily credit/debit card transactions.
Also, instead of a traditional interest rate, you pay a fixed fee known as a factor rate. For example, if you borrow $10,000 at a 1.3 factor rate, you’ll repay $13,000 — regardless of how quickly or slowly you pay it off.
Common POS Financing Providers and Their Terms
There are several companies that provide this type of financing. Here’s a look at some of the most common options and the associated terms:
Square Loans (formerly Square Capital)
- Who it’s for: Existing Square users with consistent sales volume
- Loan Amounts: $300 to $250,000
- Repayment: Fixed percentage of daily card sales (usually 10–20%)
- Term: No set term, but must be repaid within 18 months
- Minimum Requirements: Active Square account with consistent processing volume
Shopify Capital
- Who it’s for: Shopify merchants
- Loan Amounts: $200 to $2 million
- Repayment: Daily percentage of sales (usually 10–30%)
- Term: Must repay within 12 months or until paid in full via sales
- Minimum Requirements: Active Shopify store with sales history
PayPal Working Capital
- Who it’s for: Businesses using PayPal for payment processing
- Loan Amounts: Up to 35% of annual PayPal sales (max $150,000 for first loan)
- Repayment: Deducted from daily PayPal sales (10–30% typically)
- Term: Must repay within 18 months
- Minimum Requirements: PayPal Business account, at least 3–12 months of sales history
Toast Capital for Restaurants
- Who it’s for: Restaurants Using Toast POS)
- Loan Amounts: $5,000 to $300,000
- Repayment: Daily percentage of credit card sales (typically 8%–15%)
- Term: No set repayment period — repay automatically as sales come in (typically 3–12 months)
- Minimum requirements: At least 6 months of processing history with Toast, consistent volume of card sales
Clover Capital
- Who it’s for: Clover POS users (with processing through Bank of America Merchant Services or Fiserv)
- Loan Amounts: $1,000 to $500,000+
- Fees: Factor rate model (e.g., 1.2x the amount borrowed)
- Term: Flexible; depends on sales volume — typically repaid in 6–12 months
- Minimum requirements: History of consistent sales, at least several months in business
Lightspeed Capital (Powered by Stripe Capital)
- Who it’s for: Businesses using Lightspeed POS with Lightspeed Payments
- Loan Amounts: $2,000 to $500,000+
- Repayment: Daily percentage of card sales (usually 10%–15%)
- Term: No fixed term; payback depends on sales (usually 3–12 months)
- Minimum requirements: Consistent card sales history (offer is invite-only based on transaction data)
Costs and Risks of POS Financing
POS financing may seem convenient, but it can cause issues for your business if you don’t plan carefully. Here are some common challenges to keep in mind:
High Upfront Fees
Repayment isn’t based on interest rates. Instead, you pay a fixed fee or factor rate, which typically ranges from 1.1 to 1.5. These fees can be quite high, with an effective APR ranging from 30% to 100%+, depending on the repayment speed. Plus, because the fee is built into the balance due, you don’t save money by paying off the advance early.
Potential Cash Flow Challenges
Repayment is based on a set percentage of daily credit/debit card sales (typically 10%–20%), which is automatically withheld each day. This daily drain can strain cash flow, especially during slow periods.
Long-term Implications for Your Business
If you aren’t able to pay back the merchant advance within the specified timeframe, you may end up taking on more debt to keep up with payments. In other words, businesses may take new advances to repay old ones, leading to a cycle of dependency on expensive short-term capital.
Red Flags and Common Pitfalls to Avoid
If you’re considering POS financing, keep these potential issues in mind and avoid any agreements that raise red flags:
- Hidden Fees and Unclear Terms: Watch out for vague or missing details about the total repayment amount, factor rate, or daily deduction percentage.
- Aggressive sales tactics: Be wary of high-pressure reps pushing you to sign quickly without fully explaining terms. The same goes for promises of “guaranteed approval” or same-day funding before reviewing your financials.
- Risk of Becoming Dependent on Frequent Advances: Some lenders automatically offer new advances before the current one is repaid, leading to rolling, expensive debt. Renewal without fresh underwriting or review is a red flag. But even if your loan doesn’t automatically renew, you may fall into a debt cycle if you need to take on an additional advance to pay off the old one.
- Complications When Changing Payment Providers: This is one of the most overlooked pitfalls of this type of financing. Most merchant based financing agreements require you to keep using the same processor until the funds are fully repaid. Switching processors could violate the terms of the funding agreement, triggering a default and requiring immediate repayment in full.
What to Do If You’re Struggling to Repay
If you’re struggling to repay a POS-based advance, act quickly to prevent the situation from spiraling. These agreements often lack the flexibility of traditional loans, and defaulting can have serious consequences.
1. Stop Taking New Advances
Avoid the temptation to “stack” another advance just to stay afloat. That can lead to a debt spiral that’s nearly impossible to recover from.
2. Contact the Financing Provider Immediately
Some providers may be willing to temporarily reduce the repayment percentage, offer a pause in collections, and/or extend your repayment timeline. Be honest about your situation and ask what options exist. While traditional restructuring is rare, some flexibility may be possible, especially with fintechs and investor based funding agreements that value customer retention.
3. Review the Contract Carefully
There are certain provisions and clauses you should check for in a POS financing agreement, including:
- Default clauses: What triggers them?
- Confession of judgment or personal guarantees: Can the funder pursue you personally and go after your personal assets ?
- Early repayment clauses: Will switching providers accelerate repayment or have a pre payment penalty?
If terms are unclear or you feel pressured, it may be time to get expert legal help.
4. Talk to a Business Debt Attorney
A qualified attorney can review your contract for unfair or illegal terms, help you negotiate better repayment terms, and protect you from lawsuits or aggressive collection efforts by a merchant funder. This is especially important if the lender threatens litigation or has filed a UCC lien or confession of judgment.
5. Consider Business Debt Relief Options
Depending on your situation, you may want to consider one of the following options for dealing with unmanageable POS financing debt:
- Debt settlement: You may be able to settle the balance for less than what you owe.
- Debt restructuring: A more manageable payment plan may be negotiated.
- Bankruptcy: If your debt is overwhelming and you’ve run out of other options, filing for bankruptcy could help you get the debt reorganized.
Alternative Funding Options to Consider
If you’re considering alternatives to POS-based financing, it’s smart to explore options that are more affordable, flexible, and less risky. Here are some common and accessible alternatives, depending on your business needs and credit profile:
- Business Lines of Credit: This allows you to access a revolving credit line and borrow only what you need, when you need it. A line of credit is best for managing cash flow, unexpected expenses, or short-term working capital.
- SBA Loan: These government-backed loans come with favorable terms for small businesses. They typically have lower interest rates (around 6%–12%), long repayment terms (up to 10–25 years), and strong borrower protections. The downside is that SBA loans have a slower approval process and require strong credit and documentation.
- Equipment Financing: With this option, you can borrow money specifically to purchase equipment, which serves as collateral. These loans are best for restaurants, construction firms, or any business needing machinery or tech. They offer fixed payments and are often easier to get approved than unsecured loans. However, you’re limited to using the funds for purchasing equipment and not other business expenses.
- Invoice Financing/Factoring: This type of financing allows you to receive an advance on your unpaid invoices, and the debt is repaid when your customer pays. This option offers quick access to working capital and is based on invoice quality, not your credit. However, it does involve fees of around 1% to 5% per month. It’s best for B2B businesses with long payment cycles.
Tips for Using POS Financing Responsibly
Using POS-based financing responsibly is crucial to avoid cash flow issues, overborrowing, stacking or falling into a cycle of high-cost debt. Here are some practical tips to help you use this type of financing wisely:
1. Use It for Short-Term, Revenue-Generating Needs
Only borrow when you have a clear plan to repay from incoming revenue. Ideal uses include buying inventory for a busy season, covering temporary cash flow gaps, and marketing campaigns with a measurable ROI.
Avoid using POS financing or merchant cash advances for long-term investments like equipment or expansion — traditional loans are better for that.
2. Understand the True Cost
Always ask for the total repayment amount, the fixed fee or factor rate, and an estimated time to repay based on your sales volume or cost of taking the money. Also, it helps to convert the fee into an effective APR if possible — many of these advances are far more expensive than they appear.
3. Monitor Daily Sales and Deductions
Know what percentage of your sales is being deducted daily, and track cash flow closely so you’re not caught off guard by reduced daily deposits. Consider setting up a separate account to track loan-related deductions so it doesn’t interfere with budgeting.
4. Avoid Overborrowing
Just because you qualify for a large advance doesn’t mean you should take it. Take funds for only what you truly need, based on sales forecasts and margin calculations and ability to repay.
5. Don’t Stack Advances
Taking multiple POS advances at once (called “stacking”) can crush your cash flow and lead to default. Many providers ban it in their contracts and view it as a red flag.
Is POS Financing Right for Your Small Business?
Point-of-sale financing and MCA’s masked as business loan or financing can be a fast, flexible funding option — but it’s not right for every business. Whether it’s a smart choice depends on your cash flow, funding goals, and ability to manage daily deductions. However, you are likely better off with an alternative source of funding, since these advances are quite expensive with short repayment timelines.
Tayne Law has more than two decades of experience and focuses in helping clients resolve their business debts like MCA, factoring, funding and POS funding. Our team of experienced professionals know how to navigate these often complex business debt matters. If you need help with your POS financing debt, call us for a free no obligation phone consultation at (866) 890-7337 or fill out our short contact form to speak to a team member today to learn if we can help you protect your business.
