A merchant cash advance (MCA) is an arrangement in which a provider pays a business a lump sum in exchange for a larger amount of its future revenue. The provider collects through frequent automatic withdrawals from the business's bank account or a share of card sales.
How it works in factoring
MCAs and factoring are both described as purchases rather than loans, but they buy very different things:
| Merchant cash advance | Factoring | |
|---|---|---|
| What is purchased | Future receipts not yet earned | Existing invoices for completed work |
| Who pays it back | The business, from its daily sales | The business's customers, on their invoices |
| Repayment | Fixed daily or weekly debits | When each customer pays |
| Cost expressed as | A factor rate on the advance | Fees on invoices |
| Typical users | Retail, restaurants, consumer businesses | Business-to-business sellers |
Because repayment of an MCA comes from the business's own bank account on a fixed schedule, it can strain cash flow during slow periods. Cost is quoted as a multiple of the advance rather than an annual rate, which can make comparisons difficult. Several states now require cost disclosures for commercial financing that include MCAs.
MCA providers commonly file UCC liens covering receivables. That can conflict with factoring: a factor that finds an MCA lien will usually require it to be paid off or subordinated before funding.
What to check
- The total payback amount and how quickly it is collected
- Whether existing MCA agreements prohibit other financing
- UCC filings that would block a factor from taking first priority
For a business that invoices other businesses, factoring is often the more closely matched tool.