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Invoice Factoring vs. Merchant Cash Advance

What is invoice factoring? Is it a better alternative to a traditional small business loans? How is it different from a merchant cash advance? Below we will discuss everything you need to know about invoice factoring and if it is the right funding option for your business.

What Is Invoice Factoring? How Does It Work?

Invoice factoring is the practice of borrowing money against outstanding and unpaid invoices as a secured short-term loan. With invoice factoring business owners are able to sell unpaid invoices for immediate access to working capital which can help them improve cash flow, pay employees or suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid their balances in full.

What is the process?

  • Invoice your client – Typically the invoices have a “net” term of 30, 60, or 90 days during which the client can pay the invoice.

  • Connect with a lender – Sell your unpaid or outstanding invoices to an invoice factoring lender.

  • Receive your funds – A lender typically pays 80-90% of the value of the invoice upfront. Once the invoices are paid in full you will receive the remaining balance minus fees.

  • Your client pays the lender – It is important to remember that you are selling your outstanding invoices to a lender and your clients will owe the entire balance to the lending company, not to you.

  • Collect the remaining balance (minus fees) – After the invoice is paid in full, the invoice factoring lender will send you the remaining 10-20% balance minus any applicable fees.

Invoice Factoring vs. Merchant Cash Advance

Invoice factoring is beneficial if you have steady sales yet inconsistent cash flow. Some invoice factoring lenders can charge substantial origination fees and other loan processing fees making it an expensive funding source. Invoice factoring also limits the amount you can borrow since you can only receive roughly 80% of your outstanding invoices. However, if your accounts receivable are constantly late and cash flow is crucial it might be a good option.

When considering invoice factoring, it would also be wise to consider a merchant cash advance. With a merchant cash advance you can borrow more money upfront and repay the debt via flexible daily or weekly remittances based on a percentage of actual future sales.

Which Option is Right For Your Business?

After reviewing the differences between invoice factoring and a merchant cash advance, are you ready to get the money you need to grow your business? Before you commit to any type of alternative financing, it’s crucial to do your due diligent. It is always best practice to consult with a professional and review your options.

ACR Funding has years of experience in providing alternative funding solutions for businesses of all types. If you think your business could benefit from invoice factoring or a merchant cash advance, consider applying through ACR Funding. We offer approvals within 24 hours and never charge an application fee. Contact one of our representatives today to learn more about our services.


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