Invoice Factoring vs MCA Loans: Which is the best for easy access to working capital in 2025?
In today’s ever-changing economy, small business owners have several alternative business financing options, each with distinct features and implications. Two of the most popular business funding sources are Merchant Cash Advances (MCAs) and Invoice Factoring. If you are considering either, understanding their differences is crucial for making informed financial decisions on which one might be the best fit for your business.
What is a Merchant Cash Advance (MCA)?
An MCA provides businesses with a lump sum of capital in exchange for a percentage of future sales. Repayments are typically made through daily or weekly deductions from the business’s bank account or directly from credit card sales. While MCAs offer quick access to funds, they often come with high effective annual percentage rates (APRs), sometimes reaching triple digits. This can strain cash flow, making it challenging for businesses to manage daily operations and meet other financial obligations.
What is Invoice Factoring?
Invoice factoring involves selling your unpaid invoices to a factoring company at a discount. The factoring company advances a significant portion of the invoice value—usually somewhere between 80% to 90%—and holds the remainder until the invoice is paid by the customer. Once the customer pays, the factoring company releases the balance, minus a small fee for their services. This method provides immediate cash flow without incurring debt, as it’s not a loan with traditional repayments to make but a sale of receivables.
Key Differences Between MCA and Invoice Factoring
1. Cost
- MCA: High costs with APRs that can be exorbitant, that can result in businesses repaying far more than the original amount borrowed.
- Invoice Factoring: Fees are typically a small percentage of the invoice value, making it a more cost-effective solution. Especially ideal for companies with outstanding receivables that are looking for ways to secure working capital for a growing business.
2. Repayment Structure
- MCA: Daily or weekly repayments which automatically sweep from your bank account which can disrupt cash flow.
- Invoice Factoring: Repayment is tied to the collection of invoices, aligning with your receivables. There are no loan repayments to make as the factor gets paid by your customer when the invoice falls due for payment.
3. Debt Implications
- MCA: Adds debt to your balance sheet as it is a loan to the business.
- Invoice Factoring: Does not create debt; it’s the sale of an asset (receivables).
4. Qualification Criteria
- MCA: Often requires a strong credit card sales or bank deposit history and minimum credit score/ time in businesses.
- Invoice Factoring: Focuses on the creditworthiness of your customers, not your credit score or balance sheet strength. Time in business is also not a key factor making it one of the best startup business funding sources available.
Recent Developments and Trends
MCA companies have incredibly deep pockets, thanks to the billions of dollars poured into launching and scaling their operations. Backed by major investors and private equity firms, many of these lenders can afford aggressive online marketing campaigns that keep them front and center in search results. Their flashy ads and promises of “fast funding with no credit checks” are designed to appeal to business owners in urgent need of cash — but what often gets buried are the sky-high fees and inflexible repayment terms. This visibility doesn’t always mean this going to be one of the best business funding options for your business; it’s important for small business owners to look beyond the advertising and understand the true cost of these advances. In January 2025, the New York Attorney General secured a $1.065 billion judgment against a cash advance provider accused of predatory lending practices. This settlement highlighted the risks associated with MCAs and underscored the importance of transparency and fairness in business financing.
Conversely, invoice factoring continues to gain traction as a reliable financing solution. The global invoice factoring market is projected to grow from $3.09 trillion in 2024 to $3.46 trillion in 2025, reflecting a compound annual growth rate (CAGR) of 11.9%. This growth indicates increasing adoption among businesses seeking flexible and debt-free financing options.
Invoice Factoring vs MCA: What You Need to Think About Before Deciding
What rates can I expect to pay?
- MCA: Merchant Cash Advances (MCAs) often use factor rates to determine repayment amounts, which differ from traditional interest rates. A factor rate is a multiplier applied to the advance amount to calculate the total repayment. For example, with a factor rate of 1.2 on a $10,000 advance, the total repayment would be $12,000. Factor rates for MCAs typically range from 1.1 to 1.5. However, when these factor rates are translated into Annual Percentage Rates (APRs), the cost becomes more apparent. MCAs can have APRs ranging from 40% to over 100%.
- Invoice Factoring: Fees generally range between 1 and 4% of the invoice value. A $10,000 invoice with a rate of 3% means that the factor takes a fee of $300.
What happens if I miss a repayment with a merchant cash advance?
- MCA: Defaulting on an MCA loan can be costly. You do not want to be in this position if it can be avoided. If you’re struggling to make payments, contact your lender immediately. These high-cost, fast-repay loans are likely to strain cash flow, and without strong collateral to leverage, refinancing may be difficult. Also note you may have signed a confession of judgment which dictated that you waive your right to arbitration in the instance of a missed repayment. Some States have banned this practice, but it is still valid in most and is something to watch out for.
- Invoice Factoring: There is no fear of defaulting. There are no repayments to make because the money is already yours.
How can I pay off the multiple MCA loans I have on my business?
- MCA: Consolidating this debt is the most effective solution. Sadly, for many business owners, especially those with damaged credit from missed payments, securing an alternative way to pay off the MCAs can be difficult or out of reach. This is why it is so important to know the implications of what you are getting into before you have an issue.
- Invoice Factoring: If your outstanding accounts receivables are sufficient, factoring can help small business owners pay off their stacked MCAs in one easy transaction, plus give them access to an ongoing working capital line of credit.
Conclusion
While both MCAs and invoice factoring offer viable business funding options, it’s essential to assess what you need the money for and the long-term impact on your business’s financial health. MCAs can be one of the best funding options in specific situations—particularly when a business needs a quick capital injection to take advantage of a time-sensitive opportunity, like purchasing discounted inventory or essential equipment as they are fast to fund and often require minimal paperwork. However, they’re generally not ideal for covering ongoing working capital or overhead expenses, as the high repayment costs and daily or weekly deductions can quickly strain cash flow over time.
Invoice factoring is a more sustainable and cost-effective solution, especially for businesses aiming to maintain healthy cash flow without incurring additional debt. Unlike MCAs, which can quickly become a financial burden due to high costs and rigid repayment schedules, invoice factoring works with your existing receivables—turning unpaid invoices into immediate working capital. This gives business owners the flexibility to manage day-to-day operations, invest in growth, and meet obligations without the pressure of fixed daily deductions or long-term debt. By aligning funding availability to actual revenue, invoice factoring provides a predictable, scalable way to support your business’s long-term success.
For personalized advice and to explore how invoice factoring can benefit your business, consult with financial professionals who can guide you based on your unique circumstances.
Eagle Business Credit has a proven track record of helping businesses thrive by providing flexible and reliable accounts receivable financing solutions. With decades of experience in the industry, the team understands the challenges business owners face and offers tailored funding options that support cash flow, fuel growth, and ensure stability. Whether you’re an entrepreneur looking at startup funding sources, managing rapid expansion, or simply need working capital to keep operations running smoothly, they’re here to help.
Call us today to find out more: (855) 420-8318 or Apply Now