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 |
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.
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.
An advance buys a share of future receipts and is priced on the merchant’s bank activity; factoring buys specific unpaid invoices and is priced largely on the creditworthiness of the customer who owes them.
Factoring, usually, where it fits — because the factor is taking credit risk on a business customer rather than performance risk on the merchant. The catch is that it only fits businesses invoicing other businesses on terms.
No. Factoring requires unpaid invoices to other businesses, and a restaurant has receipts rather than receivables. That is the structural reason advances exist for retail and hospitality.
Often, yes. Notified facilities involve the customer being told to pay the factor directly, which some merchants will not accept. Non-notified arrangements exist and are harder to obtain.
When it clearly fits better, yes. The merchant remembers being told the truth against your immediate interest, and the referral relationship usually returns more than a forced advance would have.
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