Weighing the Pros and Cons: Factoring vs. Merchant Cash Advances

Invoice factoring and merchant cash advances do have one thing in common: they are both business alternatives to conventional financing and typically involve a simple, fast application process with minimal credit and documentation requirements. In fact, the speed and simplicity of the application process is one thing that makes these alternatives so attractive to the small business, especially startups. However, don’t be  Factoring vs. Merchant Cash Advances deceived into thinking that merchant cash advances and factoring present you with an equal option, or you will definitely come to feel it financially in the long run.

Merchant Cash Advance

A merchant cash advance, also known as an “MCA”, is an alternative funding source that offers your business a lump sum of cash in exchange for a set amount of your business’ future credit card sales. Your business then pays back the advance in installments (often daily or weekly), which are deducted as a set percentage of daily sales. The seemingly easy collections process, fast funding, and easy requirements are very attractive to businesses, especially those that struggle to secure solutions from a bank.

However, what you may not realize is that this form of cash advance is typically associated with incredibly high rates and other costs. While this funding alternative does provide quick cash, it usually does not work in the business’ favor long-term. In most situations, a merchant cash advance should simply be avoided.

Invoice Factoring

Invoice factoring, also known as receivables financing, invoice financing, and factoring invoices, is the ongoing process in which a factoring company purchases your company’s invoices. The factoring company then quickly advances the working capital you need against your unpaid accounts receivable. With Security Business Capital, for example, you can often receive your cash within the same day. With invoice factoring, your business has the ongoing working capital needed to reinvest in order to save money or make money.

The factoring fee involved simply covers the collection risk for the factoring company; this fee is based on the size of the invoice, your credit rating and how long the invoice is expected to remain unpaid (typically within 30-to-90 days). Because factoring involves giving you cash that your business has already earned, the working capital you receive provides you with the flexibility you need, without the added burden of debt and risks. This makes it a much better long-term solution for the small business.

Which Alternative Involves Lower Risk?

In most cases, invoice factoring involves much lower risk than merchant cash advances. Why? A merchant cash advance provider will charge you based on your “projected” sales. An invoice factoring company, on the other hand, purchases your existing invoices. Because merchant cash advances are based solely on prediction – rather than a fixed dollar amount – your business could end up paying massive payments and higher costs. To make matters worse, cash advance payments can extend beyond your business’ revenue generation, yet you still owe week after week. Overall, invoice factoring simply involves lower risk than a merchant cash advance.

Which Option Ensures Lower, Overall Cost?

While invoice factoring companies charge you a small percentage of your invoice total, merchant cash advance providers charge the amount of payment plus crippling fees and rates. Consider the gentlemen that believed he was securing a quick $50,000 cash advance that would help his current cash flow needs, but later realized the total cost of payback was $75,000. While merchant cash advances promise quick cash, the high-interest rates and long-term costs put companies out of business.

At one time or another, every business will feel the need for extra cash to grow their business or take advantage of opportunities. That being said, it is incredibly important to remember that all funding sources are not created equal. The choice you make should not only provide you with the working capital you need, but also steer clear of high fees and risks. Don’t let your short-term high-needs situation push you into a choice that will result in long-term repercussions.

Security Business Capital is experienced at helping companies secure the funds they need to thrive and grow, without the high-interest rates and costs. If your small business is searching for alternative financing to expand or meet expenses, Security Business Capital can use your unpaid accounts receivable to generate the cash you need quickly and easily. To learn more, simply contact Security Business Capital for a free quote or consultation.