There are other ways to finance your business besides taking out a loan. A few alternative forms of financing, for instance, include a merchant cash advance and factoring. Whether you need extra capital to expand your business into a new market or simply continue its operations, you may want to choose one of these alternative forms of financing. Before doing so, however, you should familiarize yourself with the differences between merchant cash advances and factoring.
Merchant Cash Advance vs Factoring: What’s the Difference?
What Is a Merchant Cash Advance?
A merchant cash advance is a form of debt financing in which a lender allows you to borrow a fixed sum of money based on your business’s projected sales. The lender will typically charge interest on the merchant cash advance. Most lenders also a percentage of your business’s future sales.
What Is Factoring?
Factoring is a form of financing in which a financial institution — either a bank or an alternative financial institution — agrees to purchase some or all of your business’s accounts receivable. Accounts receivable, of course, consists of unpaid invoices. It represents money that customers or clients owe to your business. With factoring, you can sell some or all of these unpaid invoices to a financial institution.
Differences Between Merchant Cash Advances and Factoring
Merchant cash advances and factoring are two completely different forms of financing. A merchant cash advance is a form of debt financing that involves borrowing money based on your business’s projected sales. Factoring, on the sale, involves the sale of unpaid invoices.
With a merchant cash advance, you’ll have to make monthly payments to the lender. A merchant cash advance is essentially a type of loan. While traditional loans require fixed monthly payments, the monthly payments of a merchant cash advance will vary depending on your business’s sales for the respective month. Nonetheless, you’ll have to make payments when using a merchant cash advance.
Factoring is typically cheaper than a merchant cash advance. If you finance your business with a merchant cash advance, you’ll have to pay interest as well as a percentage of your business’s sales. Factoring isn’t a loan, so it doesn’t require interest payments.
You don’t need good credit with factoring. Factoring is simply the sale of accounts receivable. Financial institutions that offer factoring aren’t concerned about your business’s credit. Rather, they are only concerned about your business’s accounts receivable.
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[…] Get cash based on business activities. If you’re facing an immediate need and don’t have a savings account or line of credit to fall back on, you may still be able to get cash. Use your receivables to get cash by selling them at a discount; this is called factoring. You receive less than the face value of the receivables, but can usually obtain cash quickly. A variation on this is a merchant cash advance, which is a type of debt financing based on your projected sales. This can be a costly solution and probably should only be used as a last resort. Learn more about the differences between these cash options here. […]
[…] Get cash based on business activities. If you’re facing an immediate need and don’t have a savings account or line of credit to fall back on, you may still be able to get cash. Use your receivables to get cash by selling them at a discount; this is called factoring. You receive less than the face value of the receivables, but can usually obtain cash quickly. A variation on this is a merchant cash advance, which is a type of debt financing based on your projected sales. This can be a costly solution and probably should only be used as a last resort. Learn more about the differences between these cash options here. […]