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FACTORING AND MERCHANT CASH ADVANCE ACCOUNTS
Factoring and Merchant Cash Advance (MCA) are two different financial arrangements that businesses use to access funds based on their accounts receivable, but they work in distinct ways:
- Factoring:
Factoring is a financial transaction where a business sells its accounts receivable (unpaid invoices) to a third-party financial company known as a “factor” at a discounted rate. In exchange, the business receives immediate cash, typically a percentage (e.g., 80–90%) of the total invoice value upfront. The factor assumes the responsibility of collecting payments from the customers on those invoices.
Here’s how factoring typically works:
- A business provides goods or services to its customers and generates invoices with payment terms (e.g., net-30, net-60).
- Instead of waiting for these invoices to be paid, the business sells them to a factoring company.
- The factoring company pays the business a portion of the invoice amount upfront, usually within 24-48 hours.
- The factoring company then takes over the responsibility of collecting payments from the customers.
- Once the customers pay the invoices, the factoring company remits the remaining amount to the business, minus their fees and charges.
Factoring is often used by businesses that need immediate cash flow to cover operating expenses or fund growth. The factor’s fee is typically determined by factors such as the creditworthiness of the business’s customers, the size of the invoices, and the industry in which the business operates.
- Merchant Cash Advance (MCA):
A Merchant Cash Advance (MCA) is a form of financing where a business receives a lump sum of cash in exchange for a percentage of its daily credit card sales or future receivables. Unlike factoring, which is based on accounts receivable invoices, MCA is primarily tied to a business’s daily credit card transactions or other incoming revenue streams.
Here’s how MCA typically works:
- A business applies for an MCA from a financing company.
- The MCA provider assesses the business’s daily credit card sales or future receivables.
- Based on this assessment, the MCA provider offers the business a lump sum of cash.
- Instead of fixed monthly payments, the MCA provider collects a percentage of the business’s daily credit card sales or receivables, often referred to as the “daily holdback.”
- The MCA provider continues to collect the agreed-upon percentage until the advance, along with fees and charges, is paid off.
MCAs are known for their convenience and quick access to cash but can be expensive due to the high fees and the daily repayment structure. Businesses that have inconsistent cash flow or a significant portion of their revenue coming from credit card sales may consider MCAs when they need short-term financing.
It’s important for businesses to carefully assess the terms, costs, and implications of both factoring and MCA before deciding which financing option is most suitable for their needs, as they can be expensive forms of financing compared to traditional loans.
- This discussion was modified 1 year ago by Gustan. Reason: Wrong url