MCA vs Invoice Factoring

What is the difference between a Merchant Cash Advance (MCA) and Invoice Factoring

9/11/20232 min read

Merchant Cash Advance vs Invoice Factoring: A Comparative Analysis

In the world of business financing, Merchant Cash Advances (MCAs) and Invoice Factoring are two popular options that provide quick access to cash. However, they operate on different principles and offer unique advantages and disadvantages. This article will delve into the key differences between these two financing methods.

Understanding Merchant Cash Advances (MCAs)

A Merchant Cash Advance is a type of business funding where the business receives money in exchange for a percentage of its future sales. MCAs are often considered a last resort because they are one of the most expensive types of funding. MCA lenders charge high rates of interest in addition to extra fees, although it is not called interest because it is not a traditional loan. MCAs are purchase agreements, so they do not show an interest rate and do not technically charge interest, they just pay you less than your future receivables are worth. That seems fair enough. But they end up paying you much, much less. As a point of comparison, credit cards charge 18-29% APR (annual percentage rate), while an MCA can result in an APR as high as 200%. That's not a typo.

Understanding Invoice Factoring

Invoice Factoring, also known as “accounts receivable funding”, is a cash advance on a business’s accounts receivable. 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. Factoring fees are a percentage of the invoice. Where an MCA is based on future projected revenue, invoice factoring as based on actual current invoices.

Key Differences Between MCAs and Invoice Factoring

Risk Factor

When it comes to risk, there’s a big difference between invoice factoring and MCAs. Factoring advances money based on an existing invoice, making it less risky than MCAs which give you money based on an estimate of future sales. If your sales fall short, you’ll still need to repay the money.

Cost Implications

MCAs can be far costlier than invoice factoring. 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.

Impact on Cash Flow

Invoice factoring is designed to help small business owners maximize their cash flow. By contrast, 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.


While both MCAs and Invoice Factoring offer fast access to cash, they have very different pros and cons. Understanding these differences is crucial for making an informed decision about which financing option is best for your business. If you are struggling with a Merchant Cash Advance, contact us today.