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4 Key Differences Between Invoice Factoring and Merchant Cash Advance


July 30, 2019

Every small business owner knows that cash flow is the life blood of a company. With it, you can purchase raw materials and inventory, pay your overhead expenses and keep up with payroll. Without it, you may find yourself unable to fill orders or meet your financial commitments.

For these reasons, business owners seek out sources of funding that can help them meet their business obligations AND provide a consistent influx of capital to drive innovation and ultimately growth.

One method of financing that you may have heard about is a merchant cash advance, or MCA. On the surface, it sounds like it might be similar to invoice factoring – but is it? Let’s look at some of the biggest differences between the two.

1. Invoice Factoring is Less Risky Than a Merchant Cash Advance

There’s always some risk involved in financing a business. For the lender, the risk is that the business may miss payments or, in the worst-case scenario, fail to pay back their debt. And, for the business owner, the risk comes in the form of fees and interest.

When it comes to risk, there’s a big difference between invoice factoring and MCAs. Factoring advances money based on an existing invoice. The money that your customer owes for the product or service is advanced to you through the sale of your invoice to the factoring company.

By contrast, MCAs give you money based on an estimate of future sales. If your sales fall short, you’ll still need to repay the money. More than that, MCAs usually require access to your bank accounts so they can take out the funds automatically. If you’re already experiencing cash flow issues, this can make it worse.

2. Merchant Cash Advances Can Be More Expensive Than Factoring

You probably already know that a risky form of financing is likely to cost more than one that carries a low risk. So, it should come as no surprise that MCA loans can be far costlier than invoice factoring.

Factoring fees are a percentage of the invoice. There’s a basic fee that applies to each invoice factored as spelled out in your contract. If an invoice remains unpaid past the initial payment term between you and your client, you may be charged back the advanced amount.

MCA fees can be significantly higher than factoring fees. The fee is typically between 20% and 50% of the amount borrowed. Even if your sales match the predictions, you’ll still end up paying back significantly more than your initial advance.

Something else to consider, MCAs are considered commercial transactions, so they are not subject to the same federal regulations that banks are. While a 20-50% advance fee might be common, APRs can exceed 300%. Plus, the payment structure is already determined at the time of the advance, so you can’t pay it off early to stop the interest from accruing.

3. Invoice Factoring Maximizes Cash Flow and Merchant Cash Advances Don’t

Invoice factoring is a product that’s designed to help small business owners maximize their cash flow. That’s because it advances money against invoices that have already been fulfilled. When you factor an invoice, you get money immediately – often the same day – which you can then use to buy materials, invest in your company or make payroll.

By contrast, MCAs are speculative. They provide you with a lump sum, but if you use that money to pay off existing debts, you may find yourself caught in a vicious cycle of requiring another cash advance to pay off the first with the meter running on the second.

With factoring, you know your cost and fees upfront, and because it’s the sale of your invoice, there is no debt or interest to worry about.  It’s not a loan.

4. Invoice Factoring Includes Back Office Services, MCAs Don’t

When you get an MCA, all you’re getting is money. One of the most important differences between an MCA and factoring is your factoring fee includes some time and potentially money-saving back office services that can help your business grow.

For example, factoring companies typically provide services that include billing and invoice collection. It can be quite expensive to pay someone to make collection calls on your outstanding invoices. Experienced factoring account executives work as an extension of your team and on your behalf.


Overall, invoice factoring can be a less expensive and more comprehensive financing option than a merchant cash advance. If you would like to speak to us about how invoice factoring can help your company grow, contact Triumph today.