What is the Difference Between an MCA and Invoice Factoring?

Invoice Factoring Can be less of a risk than a MCA

When it comes to risk, there is a big difference between invoice factoring and MCAs. Factoring advances money based on an existing invoice. The money that your customer owes for the product or service is advanced to you through the sale of your invoice to the factoring company.

MCAs give you money based on an estimate of future sales. If your sales fall short, you will still need to repay the money. MCAs usually require access to your bank accounts so they can take out the funds automatically. If you are already experiencing cash flow issues, this can make it worse.

MCAs Can Be More Expensive Than Factoring

The riskier a form of financing is the more it will cost. So, it should come as no surprise that MCA loans can be far costlier than invoice factoring.

Factoring fees are a percentage of the invoice. There is a basic fee that applies to each invoice factored as spelled 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 and related fees.

MCA fees can be significantly higher than factoring fees. The fee is typically between 20% and 50% of the amount borrowed. Even if your sales match the predictions, you will still end up paying back significantly more than your initial advance.

Invoice Factoring Maximizes Cash Flow and MCAs Do not

Invoice factoring advances money against invoices that have already been fulfilled. When you factor an invoice, you get money immediately, 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.

Do your Homework

Factoring and MCA’s have very different fee schedules.  Make sure you know ALL the fees related to both types of financing.  Consider, penalty fees for bounced MCA payments as those can add up quickly.  Find out about early pay options, termination fees, and other fees that may incur after your initial funding.  Factoring advances are paid when you invoice your customer.  MCA’s are paid with daily withdraws from your bank.  Make sure you know the fees related to both and exactly how much it will cost.

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