For restaurants and other businesses that use a Point of Sale (POS) system, it’s very likely you have seen offers to borrow money from your POS vendor through a POS loan. These offers promise “fast” and “easy” money with limited application requirements. Are POS loans a great source of cash for you? Or are they a devil’s bargain, setting an expensive trap for small businesses? Here, we’ll dive into POS loans and offer some advice on whether you should or should not take one.

We’ll cover in detail:

    1. What are POS loans?
    2. How do POS loans work?
    3. What are the pros and cons of POS loans?
    4. How do POS loans compare to other financing options?
    5. Final word: should you or shouldn’t you take a POS loan?

1. What are POS loans?

The term “POS loan” can mean different things, so we’ll start by clarifying the term. Sometimes the term is used to describe loans to consumers made at the “point of sale” (think of Best Buy offering you a way to finance an appliance as you check-out). Other times, it’s used to describe loans made to small businesses by their POS vendors. In this article we are referring to the second one.

POS loans are those offers of financing that POS vendors offer their merchants. Most of the top POS companies offer financing to businesses using their systems, including Toast, Square, SpotOn, Lightspeed, Clover and many more.

These loans can range from $5,000 to $250,000 or even higher, are available to restaurants and other businesses that are small or large and are even available to owners and businesses with less than perfect credit.

2. How do POS loans work?

In general, POS loans provide a lump-sum of cash to your business, and allows the borrower to pay the lender back with daily payments in one of two ways depending on if the POS provider is or is not the credit card processor. If the POS provider is also the credit card processor, then repayment happens through the processor withholding a % of your daily credit card transactions. This % is called the “repayment rate”.

If your POS vendor is not your credit card processor, then daily (or in rare cases weekly) payments are made via ACH bank payments based on a set % of your POS sales.

These loans have a fixed fee, and that fee plus the amount borrowed represents the total amount to be repaid. Below is an example of the basic terms of a POS loan:

    • Financing Amount:      $10,000
    • Fixed Fee:                   $2,000
    • Total to be Repaid:     $12,000
    • Repayment Rate:        10%

In this example, if you accept that offer you would receive $10,000 on day one. Ten percent (10%) of your daily credit card transaction total would then be withheld until you have repaid the total amount due of $12,000. As with most of these loans, there isn’t a set term – the term is simply however long it takes you to pay the total amount being repaid based on the daily repayment rate.

The POS lenders can give you an estimate of how long it will take you to repay a POS loan, or you can independently estimate the time to repay by looking at your monthly credit card sales and multiplying by the repayment rate. If your credit card sales are $60,000 per month, then with the above example, you will repay $6,000 each month ($60,000 x 10%) and therefore take about two months to repay the $12,000 required.

3. What are the pros and cons of POS loans?

“Pros” of POS Loans

There are some clear “pros” to using a POS loan for financing, including ease and speed.

The biggest benefit is simply ease. They are easy to apply for, qualify for and repay, and you can usually have cash within 24 hours.

For the application, your POS vendor has lots of information on your business already, including details about your ongoing sales. They will require additional application information, but often this is collected online and is fairly minimal.

Another helpful feature – most POS loans do not require excellent credit. Many owners with poor credit will still qualify, since qualifying is based more on the business sales than any other factor. Owners with poor credit may, however, have higher overall costs and shorter terms than those with strong credit.

These loans also make repayment very easy. You don’t have to write checks, or remember to make payments. Plus, the POS vendor is already connected to your bank for making deposits so you don’t even have to go through the setup of the bank connection.

“Cons” of POS Loans

Okay, so they are very easy and usually very fast. But there are definite “cons” to these loans as well. These include ease of access (yes, this was a “pro” also!), cost, transparency and duration (or “cashflow” risk).

First, the ease just described can work against you. By making it so easy to borrow money, it’s possible for a business to make a quick decision without investing sufficient time in weighing options or assessing the downside.

An even bigger “con” is the tendency of these loans to be fairly expensive and have costs that are not always transparent. Lenders often do not use APR (annual percentage rate) to describe the costs of the loans (the legal language of the financing allows lenders to not specify APR).

However, in pure APR terms these loans can have APRs of anywhere from 15% to 100% or more! How is this possible? Let’s use the earlier example, where a seemingly small fee is actually an APR of 80%.

Loan Details:

    • Financing Amount:      $10,000
    • Fixed Fee:                   $2,000
    • Total to be Repaid:     $12,000
    • Repayment Rate:        10%

In this example, the fixed fee is $2,000. Let’s assume you repay this in 90 days (remember, the time to repay isn’t fixed, it’s based on your credit card sales and the repayment rate). If you pay it back in 90 days, then you’ve paid a $2,000 fee in only three months. To annualize this, you multiply the $2,000 by 4, which is $8,000. The APR in this example is 80% ($8,000 divided by $10,000).

The final “con” is a risk you need to watch out for. The typical repayment terms for POS loans is from 90 days to 365 days. The most common range is 120-270 days (4-9 months). For these short repayment times, you might find there is a real drain on your business to make the repayments.

The strain of making repayments is truly the biggest risk to POS loans. For a restaurant or business with strong cashflow, this might not be an issue at all. For a business struggling a bit with profitability and available cashflow, the repayments could pose a serious and not fully expected problem.

4. How do POS loans compare to other types of financing?

There are many types of financing for small businesses, and a deep dive on these is beyond the scope of this discussion. However, here are some general notes on comparing POS loans to other options.

In business lending, the faster you can access the cash, the more expensive it’s likely to be. Thus, POS loans are some of the most expensive loans you will find.

The opposite is true as well. The least expensive option for business financing is traditional bank financing, but bank loans are usually very difficult and time-consuming, often taking months to secure. POS loans are very quick alternatives for businesses that need cash right away and can put that cash to use in their business.

Bank loans and SBA loans carry the best rates of any business financing, and the terms of those loans are the longest you will find. Instead of repayment terms that are 3 to 9 months like POS loans, those loans have terms usually from 3 to 10 years. This makes repayment much easier on business cashflow than short-term loans like POS loans.

POS loans are available for owners and businesses with little established credit or credit that is not very strong. Usually, when poor credit is involved, the costs of any borrowing will be higher and terms will be shorter.

If you’re an owner with strong credit, you will almost always find lower cost options and longer terms than can be found with POS loans. These include not only SBA loans, but also working capital loans and term loans offered by a variety of national lenders and online financing companies.

5. Final Word: Should you or shouldn’t you take that POS loan?

The decision to take a POS loan or not comes down to these important questions:

  • How quickly do you need money?
  • What will you do with the money?
  • Do you have better options?

How quickly do you need the money?

If you need money within a day or two, there are only a few options. One option is a POS loan. Other options include cash advances, working capital loans and term loans, usually offered by online financing companies. To find these quickly, it’s often helpful (and free) to work with a financing broker.

If you need the money in a few weeks or a month, you might want to consider multiple options and not only the POS loan. You can apply to many different lenders if you have the time and know-how, or you can work with a financing broker to quickly narrow down options.

What will you do with the money?

Another important question is – what is the use of the money? If the money will help you generate more revenue, then it might make sense to take a loan quickly, even if it’s an expensive one.

For a restaurant, for example, if the money will help make renovations to add more tables, or allow you to expand dining outdoors, or provide equipment to add efficiency to the kitchen, or allow you to hire more servers to stay open longer, all of those have the ability to quickly increase sales and help cover the cost of a POS loan.

If the money will be used for long-term improvements, where you will not see immediate sales gains, or is needed simply to survive, then taking a short-term POS loan may be less appealing. However, in some cases it may be the only option.

Do you have better options?

The last question is about choices. If you have no time to even consider options, then a POS loan might be the only solution. If you have at least a little time – a few days or weeks – then it often makes sense to compare other options.

While there isn’t a guarantee that you will find a better alternative, you might find something with lower costs or a longer term. Even a slightly lower cost loan might save you thousands of dollars. For most small businesses, such an opportunity for savings is usually worth pausing to consider and compare options.

Guest Article by Mike Spitalney. Mike is the CEO and founder of Everfund, a leading small business financing advisory firm. Mike is on a mission to help small businesses get the best financing for their needs and avoid the big C’s (confusion, clutter, complexity) of today’s lending world. Over two decades, Mike has helped thousands of businesses thrive and grow using a variety of short and long-term loan options, from working capital loans and lines of credit to SBA and bank loans. Contact Mike to learn more or discuss your business needs, or grab a seat with the Fork CPAs to discuss how these lending options would appear on your books.