The short answer
A merchant cash advance buys future receipts and repays as a share of daily takings, priced on the merchant’s own bank activity. Factoring buys specific unpaid invoices and is priced largely on the creditworthiness of whoever owes them. Factoring is usually cheaper where it fits, and it only fits businesses that invoice other businesses on terms.
These get compared because both convert future money into money now. They are underwritten on completely different things, which is why the same business can be a strong candidate for one and unfundable for the other.
| Merchant cash advance | Invoice factoring | |
|---|---|---|
| What is bought | A share of future receipts | Specific unpaid invoices |
| Priced on | The merchant’s bank activity | The customer’s credit |
| Repaid by | Daily or weekly remittance | The customer paying the invoice |
| Suits | Card and cash-heavy businesses | B2B businesses invoicing on terms |
| Speed | Days | Days, after facility setup |
| Relative cost | Higher | Usually lower where it fits |
| Customer sees it? | No | Often yes, on notified facilities |
The question that decides it
Does the business invoice other businesses on payment terms? A restaurant, a salon or a retail store has receipts and no invoices, so factoring is simply unavailable. A staffing agency or a freight company invoicing corporate customers on net-30 has exactly what a factor wants, and will usually do better there.
Where factoring is the wrong answer
- Heavy customer concentration — a factor is taking credit risk on a small number of payers.
- Customers who pay slowly or dispute routinely, which is exactly when the merchant needs the cash.
- Businesses that do not want their customers notified of an assignment.
- A need for money in 48 hours from a standing start, since setting up a facility takes longer than an advance does.
That last one is why the two products coexist. Factoring is often the better long-run answer, and an advance is often the only one available this week.