Invoice Factoring Versus an MCA Loan
When a business needs a quick infusion of cash, there are two primary options: invoice factoring or a merchant cash advance (MCA) loan. While both options provide money, there are fundamental differences between factoring and an MCA loan. Understanding the basics of each helps determine which is the right one to use.
What is Invoice Factoring?
Invoice factoring is simply selling an unpaid invoice to a factoring company for a cash advance. The factoring company immediately advances between 80% – 95% of the value of the invoice. Once the client’s customer pays the invoice to the factoring company, the remaining balance is remitted to the customer, minus a small factoring fee.
Companies that provide business-to-business services with Net30 or longer payment terms use factoring to ensure consistent cash flow. When a company factors its invoices on a daily or weekly schedule, it receives regular cash advances to use towards business payables, daily expenses, or new opportunities.
What is a Merchant Cash Advance (MCA) Loan?
An MCA loan is a short-term, lump-sum loan for businesses. A company can be approved quickly for an MCA, and the loan proceeds used for any purpose. Companies that transact sales or take payments via credit card are the primary users of MCA loans.
An MCA loan is repaid through automated deductions from the business bank account. These regular deductions require the business to monitor its account balance closely to avoid defaulting or having a negative balance.
Invoice Factoring or an MCA – How Do They Compare?
When a business needs cash quickly, the choice between factoring and an MCA loan comes down to what’s right for the business. Here are some comparisons.
| Invoice Factoring | Comparison | MCA Loan |
|---|---|---|
| Two to seven days | Approval & Underwriting | One to three days |
| Open Invoices for completed work | Collateral | Anticipated Future Sales |
| Invoice is paid to the factoring company by client’s customer on agreed-upon terms | Repayment | Business repays the advance as it generates sales, and the percentage of sales goes towards repaying the advance |
| Factoring fees are based on how long it takes for the invoice to be paid. Factoring fees average 1% – 3%. | Cost | Cost is a percentage of sales taken by the MCA lender, as well as fees. There is potential for APRs exceeding 350%. |
| Companies needing immediate cash, and the desire to create long-term financial stability and strength. | Ideal for | Companies needing a one-time cash influx to meet an immediate need. |
Choose the Right Financing for the Business Situation
Invoice factoring and an MCA loan both provide cash to businesses very quickly. MCA loans are a good choice for companies needing a one-time cash flux. Invoice factoring provides the initial cash needed and a longer-term source of money to build a financially strong company.
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