Difference between Invoice Factoring and Merchant Cash Advance for Businesses

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For businesses looking to get quick cash funding while they are in operation, two alternatives to a standard business loan is using their assets to secure new funding: Merchant Cash Advance and Invoice Factoring.

In the general sense, merchant cash advance and Factoring are similar in that they use a borrowers assets (account receivables) to secure the funds. However, there are key differences between the two.

Merchant cash advance (“MCA”) uses future earnings of a business, normally their credit card receivables, to provide the loan, while factoring uses outstanding invoices to provide cash by purchasing those invoices at a discount and having the collections directed to the factoring company.

While the end goal for a business is to receive funding, different industries are better for each one. MCA are good for internet websites whose majority of sales are paid through credit cards, and are in need of financing right away. Interest rates normally hover around 20-30 percent sometimes 50% with a term that can be on going depending on how consistent future payments are.

Factoring receivables is advantages for companies that have to wait 60-90 days or longer to receive payment on their invoices, such as trucking or shipping companies. The long wait can create a cash flow problem and that could bridged by selling account receivables (“AR”) at a discount. Discounts are usually 70-90 percent of the billed amount, depending on how collectable those bills are. There are some factoring companies that purchase receivables at 100% of the billed amount, but they charge a service fee to do so, in essence the same as it being discounted. Terms for factoring invoices are a one time purchase or it can be a contract to purchase a batch every certain time period.

Why would a business choose MCA over factoring? Mainly MCA funds much faster (within a few days) and loan payments, which is automatically deducted from future credit card payments, makes the process easier. Also, some businesses just do not qualify for invoice factoring. However, the cost of MCA is much higher than invoice factoring because of the higher risk the lender takes.

Depending on the industry your business is in, and its operations, will determine which financing between merchant cash advance or factoring is best suited for you. It is wise to interview a few companies from each side to weigh the pros and cons of Merchant cash advance and invoice factoring.

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