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 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, but MCA loans have spread across many industries.

An MCA loan is repaid through automated deductions from the business bank account, usually daily or weekly. 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 and its owners. Here are some comparisons.

Invoice Factoring vs MCA Loans

Approval Time	Two to seven days.	One to three days.
Collateral Needed	Open invoices for completed work.	Anticipated future sales.
Frequency of Funding	Invoices are submitted for factoring and funded the same day.	One lump sum.
Repayment	Invoice is paid to the factoring company by the client’s customer in agreed-upon terms.	Payments are taken daily or weekly on a fixed schedule.
Cost	Factoring fees are based on how long it takes for the invoice to be paid. Factoring fees average 1% – 3% of the gross invoice amount.	Interest and fees are precalulated and paid daily or weekly. Depending on the payoff length, APRs can range between 35% and several hundred percent.
Security	The company pledges and assigns accounts receivable. Personal guaranties may be required. Defaults handled through legal proceedings.	The company and its owners guaranty payments with all business and personal assets, often requiring a confession of judgment to avoid legal proceedings.
Ideal For	Companies needing immediate cash, and the desire to create long-term financial stability and strength.	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 with certain future sales needing a one-time cash flux. Invoice factoring provides the initial cash needed based on completed work and is a longer-term source of money to build a financially strong company.