Merchant Cash Advance or Invoice Factoring: What’s the Difference? - Amazing FBA - How to sell on Amazon UK
Merchant Cash Advance or Invoice Factoring: What’s the Difference?

Small business owners often need access to funding that goes beyond the cash they happen to have on-hand at the time. With that said, finding the right financial support can go a long way toward ensuring the success of your operation.

In your search for funding, you might consider things like traditional bank loans, a business line of credit, online loans, or credit cards. Any one of these options could be the right choice depending on the circumstances.

Along with that, you can use options like invoice factoring or a merchant cash advance to leverage expected future income as a way to access funding. While these funding options do have some similarities, they are different in very important ways. Read on to learn more about the differences between a merchant cash advance and invoice factoring.

What is a merchant cash advance?

With this option, the business gets a lump sum in exchange for an agreed-upon percentage of future credit and debit card sales. The business gets the money it needs, and the lender takes a cut of the credit and debit card receipts until the debt is paid. It is most commonly used by businesses with a poor credit history and the agreements usually come with high fees and interest rates.

What is invoice factoring?

Invoice factoring involves selling outstanding invoices in exchange for immediate cash. The factor buys the invoices from the business at a percentage of their value, and then the factor takes responsibility for collecting on the invoices. 

Accessibility 

Both options offer a way for businesses to access quick cash against expected future income. Since the business guarantees a cut of future sales or invoices to back the financing, the approvals process is usually quicker and simpler than traditional bank loans. 

Risk

The amount of risk involved will largely depend on the agreement.  This is true for both invoice factoring and a merchant cash advance. With that said, the merchant cash advance typically comes with more risk. 

The cash advance is based on projected future sales. Based on your past credit card receipts, they will advance the money and determine a percentage (known as the holdback) that they will keep each day. If the future sales align with the projections, the payments go as expected. However, if your sales fall below the projections, you might have to pay for many more months and this could come with extra fees and interest to be paid.

Additional Support

For the most part, invoice factoring is usually the cheaper option for financing. Furthermore, the factor takes over some of the responsibility for accounts receivable. Since the factor handles billing and collections for the invoices, it means you no longer have to worry about these tasks. This can save time, money, and stress. With billing and collections being handled by the factor, you can focus more of your time and attention on running your business.

Regardless of whether you choose merchant cash advance, invoice factoring or anything else, you need to do your homework before accepting funds. Make sure to read the terms and compare different offers. Choosing the right lender is just as important as choosing the right type of financing.