Invoice factoring is the sale of specific unpaid invoices from business or government customers to a factor, which pays most of the value up front and collects from your customers. It suits B2B companies with creditworthy customers and grows with your invoicing. A merchant cash advance is the purchase of part of your future sales overall, based on your total deposits, with a fixed cost. It works for businesses paid by card, cash or check, not only invoices.
Merchant cash advance vs. invoice factoring at a glance
| Merchant cash advance | Invoice factoring | |
|---|---|---|
| What's sold | A portion of your future receivables in general | Specific invoices already issued to business customers |
| Based mainly on | Your business's deposits and cash flow | Your customers' creditworthiness and the quality of the invoices |
| How cost is set | A fixed cost from a factor rate | A fee on each invoice, often growing the longer it stays unpaid |
| How it's paid back | Daily or weekly ACH payments from your account | Your customer pays the factor directly |
| Who your customers deal with | You, as usual | Usually the factor, for payment on factored invoices |
| Amount | A lump sum sized to your deposits | Moves with your invoice volume |
| Term | Months (up to 10 months with InstaFunders) | Each invoice runs until the customer pays; contracts may be ongoing |
| Works for | Card, cash, check and ACH revenue | B2B and government invoices only |
| Speed | In as little as 24 hours after approval | Days to set up; often faster on later invoices |
How invoice factoring works
- You invoice your customer as usual, on net-30, net-60 or similar terms.
- You sell the invoice to a factor. The factor checks the customer's credit and verifies the invoice.
- The factor advances most of the invoice value, often within a day or two once you're set up.
- Your customer pays the factor directly, typically after being notified that the invoice was assigned.
- The factor pays you the remainder, minus its fee.
Two terms to know. With recourse factoring, if your customer doesn't pay, you have to buy the invoice back or replace it. With non-recourse factoring, the factor takes some of the risk of customer non-payment, usually for a higher fee and only for specific reasons such as the customer's insolvency. Many factoring agreements also have minimum volumes, contract terms or termination fees, so read them closely. Spot factoring of single invoices is available from some factors at a higher price.
How a merchant cash advance works
With a merchant cash advance, a funder buys a portion of your future receivables as a whole, not specific invoices. You get a lump sum and deliver the purchased amount through daily or weekly ACH payments set from an agreed percentage of your sales. The total is fixed before you sign; we call it the hard stop number. Your customers aren't contacted and keep paying you as they always have. Because it's based on your total deposits, it works for restaurants, retailers, salons and medical practices just as well as for B2B firms.
How the costs compare
Factoring fees are usually quoted as a percentage of the invoice for each period it's outstanding, so the cost depends on how fast your customers pay. An advance's cost is set once by a factor rate and doesn't change with timing.
Hypothetical comparison. A company factors a $100,000 invoice. The factor advances $80,000 and charges a hypothetical fee of 2% of the invoice per 30 days. The customer pays in 60 days, so the fee is $4,000 and the company receives the remaining $16,000. If the customer took 90 days, the fee would be $6,000.
The same company taking an $80,000 advance at an illustrative factor rate of 1.30 has a fixed cost of $24,000, delivered over several months. Illustrative numbers only, not offers or quotes.
For a B2B business with creditworthy customers who pay reasonably promptly, factoring usually costs less than an advance. An advance's annualized cost tends to be higher because its fixed cost is spread over a short term and, since delivery starts right away, you hold on average about half the funded amount across that term. Factoring gets expensive when customers pay slowly, and it carries a non-financial cost: a third party is now in contact with your customers about payment.
Speed, paperwork and qualification
Factors focus on your customers: who they are, how they pay and whether the invoices are valid and undisputed. A young business with large, creditworthy customers can qualify for factoring even with limited history. An advance focuses on your business's own deposits. InstaFunders needs a signed application and your last three months of bank statements plus month-to-date, and funds in as little as 24 hours after approval, for businesses with 12 months+ in business, $50,000+ in average monthly deposits and a credit score of 500+. See the requirements.
Choose an MCA when… / choose invoice factoring when…
A merchant cash advance usually fits when
- Your revenue comes from card, cash or consumer payments rather than B2B invoices.
- You need a lump sum for a specific purpose, such as equipment, a build-out or inventory, rather than faster payment on existing invoices.
- You'd rather your customers not deal with a third party.
- Your invoices are small, numerous or to customers a factor won't accept.
Invoice factoring usually fits when
- You invoice creditworthy businesses or government agencies on net terms, and the problem is waiting to be paid.
- Your business is growing fast and you need funding that rises with your sales.
- Your customers are stronger credits than your own business is today.
- You're in an industry where factoring is standard. Trucking and freight companies, for example, commonly factor their invoices; InstaFunders doesn't fund trucking and logistics.
Can you use both?
Sometimes, but it takes care. A factor typically needs a clear first claim on the invoices it buys, and MCA funders commonly file a UCC-1 covering receivables. Those claims can conflict, so one party may need to agree to how the other's interest is handled. Tell both sides about the other before you sign anything. See UCC filings for how these filings work, and funding for payroll if slow-paying customers are the reason you're short.
Frequently asked questions
What's the difference between a merchant cash advance and invoice factoring?
Invoice factoring sells specific unpaid invoices to a factor, which collects from your customers. A merchant cash advance sells a portion of your future receivables in general, delivered back through daily or weekly payments from your account. Factoring depends on your customers' credit; an advance depends mainly on your own deposits.
Is invoice factoring cheaper than a merchant cash advance?
Often, for B2B businesses whose customers pay promptly. Factoring fees grow the longer an invoice stays unpaid, so slow-paying customers raise the cost. An advance has a fixed cost set by a factor rate, and its annualized cost is usually higher.
Can a business that doesn't send invoices use factoring?
No. Factoring requires invoices to creditworthy business or government customers. Businesses paid by card, cash or consumers, such as restaurants, retailers and salons, generally use other options, including a merchant cash advance based on total deposits.
Will my customers know if I use factoring or an MCA?
With most factoring, yes: customers are usually notified to pay the factor directly. With a merchant cash advance, your customers aren't contacted and keep paying you as usual.
Can I factor invoices and have a merchant cash advance at the same time?
Sometimes. Both involve claims on your receivables, and a factor usually needs a first claim on the invoices it buys, so the two can conflict. Disclose each to the other before signing and expect them to agree on how the receivables are handled.