Traditionally, business loans were the most popular choice for external funding among businesses. But nowadays, many alternative and non-traditional funding options are available in the UK market. These stand out from bank loans due to their ease of access, more flexible eligibility criteria, and faster access to cash. Merchant cash advance and invoice factoring are two such well-known examples. Both provide businesses with advanced funds to improve cash flow, but each is different in its cost structures, risks, and overall implications for businesses.
In this blog, we will explore the main differences between a merchant cash advance and invoice factoring. It will help business owners take a closer look at the available funding options and choose the one that suits their needs best.
What is a merchant cash advance?
A merchant cash advance (also called merchant funding) is a non-traditional way to finance a business. In this arrangement, providers issue cash advances to businesses in exchange for a portion of their future card sales. In a way, a business in need of external funding sells its future receivables to access urgent cash to manage its critical operations.
The amount advanced depends on the business’s average monthly sales, along with its profitability. Repayments are then made as a fixed percentage of daily or weekly card sales; most often, cash sales are excluded from the repayment structure.
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What is invoice factoring?
Invoice factoring is an invoice-based financing service that allows businesses to sell their unpaid invoices in exchange for a cash sum (generally 70% – 90% of the total invoice value). The factoring company releases the advance within 48-72 hours after the contract is established.
In an invoice factoring agreement, the factoring company assumes the ownership of the invoices and takes charge of collecting payments from the business’s customers.
Differences between MCA and invoice factoring
| Aspect | Invoice Factoring | Merchant Cash Advance |
|---|---|---|
|
Process of Working |
Sell invoices to a factoring company Get a 70–90% cash advance The provider collects payments from customers |
Advance based on card sales volume Funds within ~24 hrs after approval Repay via % of future card sales |
|
Eligibility Requirements |
Must have completed and verified invoices Based on customers’ creditworthiness |
Must accept and process card payments Based on average monthly sales |
|
Major Costs |
Factor rate: 1%–5% of invoice value Admin and legal fees may apply |
Factor rate multiplier: 1.0–1.5 Total repayment = borrowed × factor rate |
|
Repayment Structure |
Balance (10–30%) is released after the customer's payment Fees are deducted before the final payout |
Automatic daily/weekly deductions Repayments vary with sales volume |
|
Who Provides Funding |
Factoring companies/providers Non-traditional financial institutions |
MCA providers (non-FCA regulated) Not typically offered by banks |
|
Associated Risks |
Non-payment risk (recourse vs non-recourse) |
Legal but unregulated Risk of defaults or scams |
|
Time of Funding |
48-72 hrs after agreement finalised |
24 - 48 hrs after approval Some offer same-day or emergency funding |
|
Best Suited For |
B2B firms with long payment terms Manufacturing, recruitment, and staffing sectors |
Small businesses, restaurants, and salons |
Between merchant cash advance and invoice factoring, there are multiple differences. In terms of how both processes work, how to qualify for the service, the providers of the funding, and more. Let us explore these one by one, in detail.
1. Process of working
The process of invoice factoring starts when a business sells its selected invoices to a factoring company. The company issues a cash advance worth 70%-90% of the total value of those invoices. Once the contract is set up, the invoice collection process begins. In invoice factoring, the company directly contacts the customers and manages communication to collect payments on behalf of the business.
On the other hand, MCA providers assess the profitability of a business by analysing its average monthly card transaction volume and the sales history of the past few months. This evaluation helps them calculate the associated risk and whether the business will be able to repay the loan timely. The initial funds are advanced as soon as the contract is set up, typically within 24 hours. The repayments also begin as soon as the business generates new card sales.
2. Eligibility requirements
Both merchant cash advance and invoice factoring have far fewer eligibility requirements compared to traditional bank loans. Businesses are not required to maintain good credit scores to qualify for these financial solutions. Moreover, neither of them shows up as debt on the business’s accounting records.
However, while MCA and invoice factoring don’t rely on credit scores the way bank loans do, each still has its own eligibility criteria.
- Factoring companies require businesses to factor completed invoices only, meaning that the products or services must already be delivered to the customer. These invoices are then verified, and the associated business risk is assessed based on the customers’ creditworthiness. This evaluation helps determine both the advance percentage and the factor rate.
- For a merchant cash advance, a business must already be accepting and regularly processing card payments. More card sales show the business’s higher profitability and a higher tendency to successfully make repayments.
3. Major costs
The major cost of invoice factoring is the factor rate, which typically ranges from 1% to 5% of the total invoice value. In addition to the factor rate, some other charges might also be included in the total cost breakdown, like administrative costs for managing invoice payments and legal fees for setting up the contract.
The MCA cost is calculated as a factor rate multiplier ranging from 1.0 to 1.5. This represents the total amount repaid per pound borrowed. For example, a factor rate of 1.3 means that for every £1 borrowed, the business will repay £1.30.
4. Repayment structure
In invoice factoring, when the factoring company issues the 70%-90% cash advance of the total invoice value upfront, it keeps the remaining 10%-30% of funds until the customers have paid their invoices in full. Towards the end of the agreement, the provider deducts the 1%-5% payable factor rate from this balance before releasing the remaining funds to the business. Some continuous costs, like administrative charges, may also apply during the contract while the payments are being collected.
In the case of a merchant cash advance, the repayments are automatically deducted from the business’s card sales according to the fixed factor rate decided in the earlier stages of the agreement. Some providers deduct the repayments daily, and others do so weekly. Even though the factor rate is fixed (typically ranging from 1.1 to 1.5), repayments are calculated as a percentage of daily or weekly sales, not as a fixed sum. This means the business pays more when sales are high and vice versa.
5. Who provides the funding
The financial institutions that offer invoice factoring are called factoring companies, factors or simply invoice factoring providers. These are non-traditional providers who are the experts in specialised invoice factoring services, like confidential invoice factoring and single invoice factoring.
Institutions providing merchant cash advances are referred to as merchant cash advance providers. MCAs do not fall under the Financial Conduct Authority, so traditional lenders like banks typically do not offer such services. We’ll discuss the legal implications of MCAs next and discuss the risks associated with them.
6. Associated risks
Like every financing option, merchant cash advances and invoice factoring also come with their own risks.
For invoice factoring, the major concern is non-payment, which occurs when a customer fails to pay their invoice in full. The extent of liability depends on whether the agreement is recourse or non-recourse. If it is non-recourse, the liability falls on the factoring company and bears the loss instead of the business.
Since merchant cash advances are not regulated by the FDA, a common question is whether MCA is legal in the UK. The answer is yes, these are legal but unregulated. The typical concerns associated with MCAs include:
- MCA defaults, which occur when a business breaches the contract terms, such as failing to make repayments on time.
- MCA scams, where unethical providers offer unrealistic funding and terms or introduce expensive hidden fees during the agreement.
7. Time of funding
Both invoice factoring and merchant cash advances provide access to funds within a short time after the contract is approved. In the case of invoice factoring, funds are typically released within 48-72 hours after the agreement is finalised.
Merchant cash advance providers usually offer funding within 24-48 hours after both parties agree on the proposed factor rate and repayment structure. MCA providers are known for their competitive lending times and lucrative terms to target businesses running on a short timeline. These are the popular options in the industry:
- Merchant cash advance for the same-day funding
- Emergency MCA for businesses
- Get access to merchant funding with no bank statements
- Merchant cash advances for businesses with bad credit
- MCA with no credit check
8. Best suited for
Invoice factoring is best suited for business-to-business companies that have to manage extended payment terms. It is particularly ideal for manufacturing businesses, recruitment agencies, and staffing services. These industries often operate on 30, 60, or 90-day payment cycles, which can create significant cash flow gaps while they wait for invoices to be paid.
A merchant cash advance is best for businesses that need quick capital based on their daily sales volume. This makes it a strong fit for small businesses, the food industry (like restaurants), and the hospitality sector (such as salons). These businesses experience seasonal fluctuations or need immediate funds for inventory, equipment, or short-term opportunities.
How to choose the right funding option for your business?
Your choice between a merchant cash advance and invoice factoring depends on your business’s core operations.
Choose a merchant cash advance if
Choose an MCA if you are a B2C business, like a restaurant or salon, with high card sales volume. This option is best when you need quick capital based on future sales revenue with a flexible repayment system that adjusts with your daily income.
Choose invoice factoring if
Select invoice factoring if you are a B2B company, like a manufacturer or a staffing agency, with unpaid invoices from commercial clients. With this solution, you can free up cash trapped in 30-90 day payment cycles by using your accounts receivable as assets.
Ready to find your ideal funding solution with ComparedBusiness UK?
Whether a merchant cash advance is the right fit for your sales-based business or invoice factoring is better for your unpaid invoices, finding the best provider is the most important part of the process. ComparedBusiness UK simplifies this for you.
We connect you with a selected network of top-rated UK lenders for both MCAs and invoice factoring. Submit your basic requirements in just minutes, and we will match you with quotes made just for your business. You can then compare and choose the offer that perfectly aligns with your business goals.
FAQs
A merchant cash advance provides funds based on a business’s future card sales, with repayments made as a percentage of daily or weekly transactions. Invoice factoring allows businesses to sell their unpaid invoices to a factoring company in exchange for an advance worth 70% – 90% of the invoice value.
Invoice factoring providers typically release funds within 48-72 hours after the agreement is finalised. Merchant cash advance providers usually offer funding within 24-48 hours, with some offering same-day or emergency MCA options for urgent needs.
