What is Merchant Cash Advance?

From the bird’s eye point of view, an MCA – Merchant Cash Advance is not really a loan. It can be called, in other words – a sales agreement that eventually involves a small percentage of the future revenue which will be in exchange for a lump sum of money. It takes as less as 24 hours for the approval of the MCA. It’s easily accessible and the business owner gets the cash immediately. The repayment of the debt fluctuates with the incoming cash flow at the business owner’s end.

The Merchant Cash Advance is taken against the credit/debit card payments that a merchant receives on a daily basis. A small percentage – agreed by both the MCA provider and the business owner – is used as repayment. This means that more the number of credit card/debit card transactions that the business owner gets in a day, the more amount of repayment they will be able to make. This means that if the transactions are low or less, the amount of repayment made will be less.

What is Invoice Factoring and how is it different from Merchant Cash Advance?

Invoice factoring, just like MCA, isn’t a loan. In fact, the process of Invoice Factoring doesn’t involve any debt in the hands of the business owner. On top of that, there is no need for repayment as well. This is how invoice factoring works:

  • You hand over your business invoices to the factoring company.
  • They verify whether or not the invoices are honest-to-goodness and do the processing.
  • Once verified as OK, they pay most of the invoiced amount (70%-90%) to you – the business owner.
  • Then they do the client chasing and following up with the clients. That is because, your clients then need to pay the invoiced amount to the factoring company.
  • After receiving full payment from the clients, the factoring company then clears the balances after cutting their share of the fee according the agreement.

Key Differences between MCA and Invoice Factoring?

  • The first and the biggest difference between MCA and Invoice Factoring is that MCA has a very high percentage of interest rate whereas invoice factoring has a low percentage of interest rate.
  • By choosing MCA, you technically have to make repayment whereas if you go with Invoice Factoring, you don’t have to make repayments.
  • The risk factor is higher in MCA as compared to Invoice Factoring. That too solely because the repayment process depends on daily transactions at the business owner’s end.
  • If you are using MCA, you don’t need any kind of back office support. However, while using Invoice Factoring, you need back office support from the factoring company.

Conclusion

You as a business owner do not need to be worried about whether to choose MCA or Invoice Factoring based on the pros and cons of it. Just like everything under the sun, both have their own set of pros and cons. You can choose the type of financing that suits best to your business needs. And if you are confused as to what to choose and how to go about it, you can reach out to us.