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Invoice Factoring vs. Merchant Cash Advance


May 18, 2015

Which do you need in your corner?

Back in high school and all of my college years, I was an amateur boxer with a real passion for the sport. Boxers function on muscle memory, which is why professionals like Manny Pacquiao are able to throw over a thousand punches in a single match. But the one thing you never get used to, is getting hit. Let’s face it, getting hit HURTS, and the punches that hurt the worst are the ones you never see coming.

Right around the time I stopped boxing, I started my first company. I soon realized that having the right capital for merchandise and other expenses was incredibly important. I also realized that owning a business means you’re constantly hit with countless direct mail offers advertising small business cash advances and high-risk loans. The ads promise quick access to cash, with approval in minutes, and funding in days — but are these small business loans really as good as they seem?

Most businesses need access to funding at some time or another, but all funding sources are not created equal. In order to get the working capital you need, while avoiding high fees and reducing risk, it’s important to understand the pros and the cons of any business funding source. In this article, we’ll explore what a merchant card advance is, its pros and cons, and how it compares to invoice factoring.

What is a merchant cash advance?

A merchant cash advance, also known as a merchant card advance or “MCA”, is an alternative financing source that provides businesses with a lump sum of cash by purchasing a set amount of their future sales. Businesses pay back the loan in monthly installments, which are deducted as a set percentage of credit card and debit card sales, until the cash advance is paid in full. This form of cash advance is typically associated with incredibly high interest rates and should be avoided if at all possible.

How does merchant cash advance compare to invoice factoring?

Like a merchant cash advance, invoice factoring is an alternative funding source that offers businesses fast cash, without the strict credit approval requirements of traditional loans. However, there are some key differences that may make invoice factoring a better choice for your business.

Faster Access to Cash

Merchant cash advances and invoice factoring are both alternatives to traditional financing. Each involves a simple, quick application process with minimum credit requirements, making it easier and faster for small businesses to get approved — but while merchant card advances may seem like an equal option to invoice factoring, there are several “catches” that may leave you financially K.O.’d in the long run.

Lower Risk

First of all, merchant cash advancements typically involve more risk than invoice factoring. A merchant card advance charges you based on your “projected” sales, while invoice factoring companies purchase your existing invoices (also called, “accounts receivable financing”). Since merchant cash advance payments are solely based on a prediction, rather than an actual dollar amount, this means that if your future sales don’t meet your projections, you could end up making massive payments, with a much higher interest rate (usually significantly more than invoice factoring). The larger problem could be that the payments continue for a period beyond your revenue generation – Similar to getting punched in the face over and over again, month after month (trust me, not fun).

The Golden Rule of Finance

Simply put, the best financing structures have terms which match the useful life of the assets being financed. It makes poor sense to finance a house for 36 months or a car for 30 years. If your cash needs are for working capital, consider the benefits of a financial solution that matches the need.

Lower Overall Cost

Unlike merchant cash advance providers, who not only charge you the amount of the payment, but a crippling, sky-high interest rate, most invoice factoring companies solely charge a small percentage of the invoice total.

Additional Back Office Services

Because invoice factoring companies purchase your unpaid invoices and proceed to collect payment from your vendor directly, you may also benefit from the back-office services these suppliers provide, including billing and collections.

Before you consider taking out a merchant cash advance, be aware of the short and long term repercussions. If you’re in a high-needs situation, their unsavory (and borderline usury) interest rates may seem worth it, but keep in mind that anything that looks “too good to be true,” usually is. It pays to have the right company in your corner, and if you’re interested in exploring your invoice factoring options, talk to Blaine Waugh at Triumph, formerly known as Triumph Business Capital. He’ll help coach you through the right solution for your business and won’t make you run laps or do sit-ups (unless you want him to)!