Invoice Factoring Rates Fees

4 Key Differences Between Invoice Factoring and Merchant Cash Advance

June 4, 2020

Every small business owners and operators understand that cash flow is very important for any company. With cash flow, you can easily buy inventory and raw materials, pay other expenses and handle the payroll. Without proper cash flow, you will have difficulties to fill orders and meet your financial commitments.

Business owners look for sources of financing and funding that helps them meet their business requirements and obligations. It also helps with continuous capital to drive growth and innovation.

One method of financing which is popular and heard of is merchant cash advance (MCA). MCA and invoice factoring have big differences.

WHAT IS INVOICE FACTORING?

Invoice factoring is selling your invoices (accounts receivables) to a third party or a factoring company to reduce debt and improve cash flow. Businesses that use invoice factoring see an immediate boost in cash flow. Independent finance providers or banks provide invoice factoring. Invoice factoring for small businesses helps the company to grow and develop.

Invoice factoring services provide a solution to cash flow problems. It provides short term capital by assigning and selling invoices to a factoring company or factor. The factoring companies usually give 70-90% of the invoice value in advance. Invoice factoring is an excellent option for businesses and companies that need access to cash quickly but are not able to secure a traditional bank loan.

WHAT IS MERCHANT CASH ADVANCE?

A merchant cash advance is a cash advance and not a loan. Cash advance that is based on the credit card sales deposited in the business’ merchant account. A business owner and operator can apply for an MCA and have money deposited into a checking account easily and quickly. After approval, sometimes it only takes 24 hours to receive funds.

MCA providers check weight credit and risk criteria very differently than other lenders or bankers. They check at daily credit card usage and receipts to see if a business is capable to pay back the advance in a timely way. It is critical for you to understand the terms you are being offered so that you can make a proper decision because the rates on an MCA could be higher than other financing options.

Also read -: 11 Tips for Selecting Best Factoring company

4 KEY DIFFERENCES BETWEEN INVOICE FACTORING MERCHANT CASH ADVANCE

Now we will discuss the differences between invoice factoring and merchant cash advance so that you can understand which option is better for your business and company. Some of the differences are as follows:

INVOICE FACTORING IS LESS RISKIER THAN A MERCHANT CASH ADVANCE

There is always some kind of risk involved when it comes to funding a business. For the business owner, the risk is interest and fees. For the lender, the risk is that the business you are lending funds to may miss on payments or simply fails to pay back their debt.

There is a difference between merchant cash advance and invoice factoring when it comes to risks. In factoring, the money is advanced based on the existing invoice and claim. The money that the client owes for the service or product is advanced to you by the selling of your invoice to a factoring company.

On the other hand, the merchant cash advance leads you money basis on an estimation of future sales. You will still be required to pay back the money, even if your sales fall short. MCA’s need to access your bank accounts and records so they can automatically take out the funds. This can make things worse if you are already dealing with cash flow problems.

MCA’S CAN BE MORE EXPENSIVE THAN INVOICE FACTORING

You should know by now that a risky kind of funding is likely to be expensive than one that carries fewer risks. So it is not a surprise that merchant cash advance loans can be more costly than invoice factoring.

The percentage of the invoice is the factoring fee. There is a basic fee that is attached to every invoice you factor in your agreement. You might be charged back the advanced amount if an invoice is not paid after the initial payment term between you and your customer.

Merchant cash advance fee is higher than invoice factoring fees. The fee structure is 20% to 50% of the amount lent. You will end up paying back a large amount than your initial advance even if your sales are great and match the predictions.

Merchant cash advances are not subject to the same regulations that banks are because they are considered as commercial transactions. APR’s can extend up to 300%, but a 20%-50% advance fee is common between the two. You cannot pay back early to stop the interest from happening, because the payment form is already set on at the time of the advance.

INVOICE FACTORING INCREASES CASH FLOW AND MCA’S DO NOT

Invoice factoring services are designed to help businesses increase their cash flow. This is because it advances money against invoices that have already been completed. You receive the money quickly, sometimes the same day when you factor an invoice. This advance can be used to invest in your company, or make payroll and also buy materials.

On the other hand, MCA’s are risky and speculative. They provide you with funds, but if you use these funds to pay off other debts, you might find yourself stuck in a cycle of need for another cash advance to pay off the initial with the time running on the second advance.

You will know your fees and costs upfront, with invoice factoring. It is not a loan, so there are no worries regarding debt or interest.

INVOICE FACTORING PROVIDES BACK OFFICE SERVICES, MCA’S DON’T

All you get is money, when you get an MCA. One of the most vital differences between invoice factoring and merchant cash advance is that the factoring fee includes time and money-saving back-office services that help in the growth of your business.

For instance, factoring companies offer services that include invoice collection and billing. It can be very costly to pay somebody to collect on your outstanding invoices. Experienced factoring companies work as an extension on your behalf and.

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