What is the difference between invoice financing and merchant cash advance?

SMEs often experiencing cash flow issues that require a financial solution to ensure operations run smoothly.

Among the options available are invoice financing and merchant cash advance (or MCA for short). Although both products provide injections of capital, they have significant differences. In this blog, we’re taking a closer look at the two options, helping firms decide which might serve them best.

What is invoice finance?

Invoice finance involves enterprises selling their unpaid invoices to a third-party. This financier advances the firm an agreed percentage of the invoice’s value before collecting the total amount from the company’s customer when the invoice becomes due.

A short-term borrowing option, companies use unpaid invoices for collateral to get funds. It lets a firm receive quick cash access from its sales ledger.

Who can use invoice finance?

Invoice financing is usually accessible to firms that trade with other enterprises and issue invoices to get paid.

How is invoice financing repaid?

Invoice financing is repaid when a customer pays their outstanding invoice to the financier. The lender deducts its fees and then advances the balance remaining to the firm that secured the finance. However, in some cases, the firms may collect a customer payment and use it to repay the financier, including any agreed interest and fees.

What is a merchant cash advance (MCA)?

MCAs are financial agreements where firms receive an upfront sum in return for a percentage of their credit card sales, plus a fee. This type of financing is popular with businesses experiencing a fluctuating revenue like restaurants and retailers.

Who can use an MCA?

Any company that takes payments through either credit or debit cards can apply to lenders for an MCA.

How are MCAs repaid?

Instead of using fixed monthly payments, MCAs are repaid via a percentage of the firm’s future debit and credit card sales. The agreed percentage is deducted automatically from the company’s daily, weekly or monthly takings until the advance paid and any associated fees have been completely repaid. Repayment amounts fluctuate according to business sales. Higher sales result in faster repayment, while lower sales mean slower repayments.

You might need invoice financing or a merchant cash advance, but either way, at AJL Finance, we can help. Add your details to our easy-to-use eligibility calculator or get in touch with our team today for further information.