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What is the difference between invoice factoring and merchant cash advance?

Technology/Functionality
Answer

When a young company needs to invest in order to maintain its development, operating capital availability is crucial. Besides, traditional bank loans lack flexibility and don’t always respond to a company’s needs. Several banking products exist to help businesses fuel their development by smoothing out their cash flow, making money available before the usual 30-90 days limit. However, not all products suit all businesses, and in the case of invoice factoring and merchant cash advance (MCA), several differences exist and must be taken into consideration before making a choice.

 

Factoringis recommended for young businesses, preferably with less than three years of existence, and with a solid business plan and growth capacity. Factoring provides capital in real time, thus allowing the company to increase its staff and purchase inventory to honour new orders.

 

A merchant cash advance is essentially a loan, and the lender uses the projected monthly sales volume to determine the loan amount. This is generally the solution adopted by businesses which don’t generate invoices but rather collects cash, checks or credit cards, such as restaurants or independent contractors. The lender’s risk is higher, as the predicted sales volume may not be met, which explains why interest rates are higher too. Therefore, merchant cash advance should preferably be used by companies with sound and healthy finances, to purchase equipment or inventory with a view to boosting sales.

 

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An additional question: Respond to this Question

  • Why turn to a factor rather than seek a bank loan?
  • How does a factoring finance arrangement work?
  • Who collects the debt due, the factor or my business?
  • What's the difference between factoring with recourse and factoring without recourse?
  • Does factoring require a minimum number of invoices?
  • What does a factoring company do in the case of nonpayment?
  • Do my customers know of the factor’s involvement?
  • What are the requirements for invoice discounting?
  • Is there any collateral requirement for factoring?
  • How quickly can I access cash for the invoices I sell to a factor?
  • Who do I turn to if I have a dispute with my factoring company?
  • I have overseas clients; can I factor international invoices?
  • Is it easy to terminate a factoring arrangement?
  • What regulations apply to factoring companies?
  • What does working capital mean to your business?
  • What is the difference between factoring and bill discounting?
  • What is credit insurance?
  • What is export factoring?
  • What is the difference between factoring and securitisation?