Universal Funding, one of the country’s leading invoice factoring companies, recently announced an analysis of companies switching from merchant cash advances to invoice factoring.
“More and more of our clients that once were choosing merchant cash advances are now choosing to finance via invoice factoring,” says Universal Funding President, Kyle Bergstedt.
A merchant cash advance is essentially a short-term loan. Some companies classify it as a “sale of future credit card sales,” which shields them from interest rate limits that can range from 10 to 100 percent. The benefits are immediate cash and an easy application process. However the bottom line is that a merchant cash advance is a process that creates debt and must be repaid, typically through a percentage of future credit card sales.
Invoice factoring, on the other hand, is not a loan and creates no new debt. There is no money to pay back. After an equally easy application process, funds are deposited immediately into the company’s bank account, based on the value of the accounts receivable submitted. Perhaps the best benefit to invoice factoring is that the financing line increases as the company’s business grows.
What Universal Funding is experiencing, which may be a trend across the country, is that more and more of their customers, who would often choose merchant cash advance, as a way of shoring up cash flow problems, are now more often selecting invoice factoring.
Keep in mind, that both funding sources have benefits, but there are some key differences when a company finds itself facing a cash flow problem. Invoice factoring has the advantages of:
- Creating no company debt
- Lower rates, typically in the 1-3 percent range
- Easy and faster approval
- Not dependent on debt structure or credit health
- No hidden fees
These advantages are why companies are making the switch from merchant cash advances to invoice factoring. Instead of receiving financing off of future sales, they are opting to finance recently sold product or services.