4 Key Differences between Invoice Factoring and Merchant Cash Advance

Every small business owner knows that cash flow is crucial for the growth of a company. One method of financing that you may have heard about is a merchant cash advance, or MCA. On the surface, it sounds like it might be similar to invoice factoring – but is it? The following are 4 of the biggest differences between the two.

  1. Invoice factoring is less risky than an MCA. In terms of risk, there’s a big difference between invoice factoring and MCAs. Factoring advances money based on an existing invoice, whereas MCAs give you money based on an estimate of future sales. If your sales fall short, you’ll still need to repay the money. Plus, MCAs typically require access to your bank accounts so they can take out the funds automatically. If you’re already experiencing cash flow issues, this can make it worse.
  2. MCAs are more expensive than factoring. Factoring companies like American Funding Solutions charge a small fee based on a percentage of each invoice factored as laid out in your contract. If an invoice remains unpaid past the initial payment term between you and your client, you may be charged back the advanced amount. MCA fees can be significantly higher than factoring fees – typically between 20% and 50% of the amount borrowed. Even if your sales match the predictions, you’ll still end up paying back significantly more than your initial advance.
  3. Invoice factoring maximizes cash flow and MCA’s do not. Invoice factoring is meant to help small business owners maximize their cash flow. That’s because it advances money against invoices that have already been fulfilled. When you factor an invoice, you get money immediately – often the same day – which you can then use to buy materials, invest in your company or make payroll. MCAs are speculative. They provide you with a lump sum, but if you use that money to pay off existing debts, you may find yourself caught in a vicious cycle of requiring another cash advance to pay off the first with the meter running on the second.
  4. Invoice factoring includes back office services, MCAs don’t. Factoring companies typically provide services that include billing and invoice collection. Experienced factoring account managers work as an extension of your team and on your behalf.

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