Updated: Jul 18, 2019
Recently, Merchant Cash Advance has become more prevalent. We're here to break down invoice factoring versus Merchant Cash Advance and let you know what the differences are if your business decides to go in one direction or the other.
What is Invoice Factoring:
Invoice factoring or just simply "factoring" is a financial transaction where a client sells their unpaid invoices/receivables to a financial institution (the factoring company) in return for an advance on a percentage of the amount owed on their receivable. The factoring company is responsible for collecting the invoice/receivable in the usual 60 or 90 day term of the receivable.
One important thing to remember is that invoice factoring, unlike traditional financing, is not a loan. According to Entrepreneur.com, factoring "doesn't create a liability on the balance sheet" and factoring companies "traditionally take over a significant portion of the accounting work for their client, help you with credit checks, and generate a financial report to let you know where you stand."
Invoice factoring is much more than a traditional loan too. It works in such a way where the factoring company purchases invoices from the client and gives them an advance on their earnings.
What is a Merchant Cash Advance Loan:
Merchant cash advance has become synonymous with a whole host of short-term business loans but it traditionally refers to a financing company advancing cash to a business in exchange for a percentage of daily credit card and debit card sales. It also usually includes a fee. Merchant cash advance can be a quick way to get cash for many businesses but Nerdwallet recently wrote an article cautioning businesses using from using Merchant Cash Advances (MCAs).
"MCAs have been known to carry annual percentage rates - the total cost of a loan, including the fees - in the triple digits. These costs, as well as the daily repayment schedule, can cause serious cash-flow problems. In some cases, MCAs lead to a debt trap, where it's virtually impossible to repay and you must refinance into another and yet another - MCA or file for bankruptcy."
Porter Capital has aided many clients that have been actively working to free themselves from their MCA debt. Are you working to get away from a Merchant Cash Advance? Reach out to us at firstname.lastname@example.org or head over to www.portercap.net/apply and we may be able to help take your business into the future.
Want to learn more about factoring? Download our invoice factoring guide to learn more about the benefits of factoring.