Risk vs. reward: “Merchant cash advances” and “Invoice factoring”
Are merchant cash advances worth the risk? Here’s why you might want to think again…
Even with the best of contingency plans, every business will one day run into trouble with their cash cycle.
Maybe your supplier’s payment is due, but your biggest customer unexpectedly had to delay their payment to your business. Maybe you had a catastrophic breakdown in some of your equipment and don’t have the funds to cover replacement. Regardless of the reason, the end result is the same: your business needs funds quickly.
A traditional bank loan would take far too long to get approved, so you might be considering two other options: invoice factoring and a merchant cash advance (MCA).
But both options are not created equal. Here’s a quick rundown of how the two will affect your business.
This is essentially where a funding company “purchases” your unpaid invoices at a slightly reduced rate.
If, for example, you’re awaiting a payment of $10,000 on a 60-day schedule but you need money now, invoice factoring will ensure you have access to that $10,000, minus a one-time upfront fee. Your customers can then make their payment directly to the funding company.
Learn more about invoice factoring here.
Merchant Cash Advance
Instead of purchasing your invoices, this option provides you an advance based on projected sales. If you need that $10,000, the lender will offer you the funds, but you will have to repay it (like a loan) on a payment schedule, and with a percentage on top.
Therein lie the two problems with an MCA. First, until you pay back the advance in full, you’re beholden to the lending company. If you run up against more trouble with your business, you’re still stuck with a hefty payment.
Secondly, the percentage on top is typically very high. Taken together, that leaves you with all the risk, and apart from the speed of getting the money, very little reward.
With that in mind, it’s rare that an MCA would be recommended. Instead of playing the projections lottery, focus on the money that you already have committed to you and look to invoice factoring.