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The Difference Between an MCA Loan and Invoice Factoring

For many small business owners merchant cash advances or MCA loans pose a tempting offer of quick business financing. Unfortunately, an MCA comes at a high cost and often damages your cash flow through frequent withdrawals. When cash flow is the lifeblood of your business, it can be impossible to grow with daily or weekly repayments at high costs. If you are looking at small business financing options, understand what the costs, fees, and repayment structures will do to your cash flow and your small business growth.

1. I’ve been looking at MCA loans and invoice factoring. What rates can I expect?

Merchant cash advances work in one of two ways. The first is that you repay the loan amount with future credit card sales. This means that maybe 10% of your daily credit card sales go to the MCA lender until the loan amount plus the repayment and fees are paid off.

The second method is through daily ACH withdrawals. This means the MCA company pulls a fixed repayment amount daily from your bank account.

The danger with both of these repayment structures is that an MCA will damage your cash flow. Fixed monthly payments like rent or payroll will challenge these repayments. Especially since the APR of a merchant cash advance can get at high as the triple digits. You could be paying 100% or more of your loan amount as repayment.

Invoice factoring, on the other hand, is an advance on your receivables. This means that the factoring company takes between 1 and 4% of the invoice value as a fee and the remainder of the money belongs to you. A $1,000 invoice with a rate of 3% means that the factor takes a fee of $30 while your company has access to the remaining $970.

2. What happens if I miss a repayment with a merchant cash advance?

Some MCA agreements are unsecured, which means that there is no collateral attached. Failure to pay does not mean you lose your house. However more and more frequently MCA lenders are requiring a personal guarantee which leaves you personally liable for repayment.

Many MCA lenders required signed confessions of judgment which dictated that you waive your right to arbitration in the instance of a missed repayment. State oversight is stepping in and banning this practice, but in some cases it is still going on and it’s something to look out for.

You do not want to default on an MCA. If you miss a payment, contact your lender immediately and work out the terms of future payments. You don’t want to miss multiple payments and have your credit score fall accordingly. MCA loans can do real damage to your cash flow, so it’s not unlikely that you could miss a payment. Many businesses work with other lenders to pay of the balance of the MCA. This is seen as a better option than struggling to make payments or defaulting on your loan because of the expensive rates and unfair repayment terms.

Invoice factoring is debt-free. There are no repayments to make because the money is already yours. Taking an advance on your receivables means your business has the cash flow to grow. There is no fear of defaulting and you can actually build your business credit by having the cash on hand to make payments early to your suppliers. You aren’t jeopardizing your house or car or business. The money is yours, and there is no repayment.

3. I have multiple MCA loans on my business. How can I pay off all my debt?

We see businesses that have one or sometimes multiple MCAs. It can become a debt cycle when you get an MCA then you need another MCA to pay off the first MCA. Debt consolidation and trimming down the amount of cash advances is your best bet. For many business owners however, especially if their credit score has been hit by missing payments on the cash advances, a loan big enough to pay off the MCAs can be out of reach.

Invoice factoring companies, like Eagle Business Credit, can help small business owners pay off their stacked MCAs. We work with companies to provide the cash flow needed to regain control of their finances. You don’t want to hurt your cash flow with expensive rates and daily payments. Having a debt-free method of business finance can really give you the flexibility to grow your business instead of struggle to keep afloat.


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