Why Accounts Receivable Financing Should Be Your Fast Financial Solution
If your small business needs cash quickly, there are several financing options available. Two of the most popular are accounts receivable financing, also called factoring, and merchant cash advance. While these two methods may appear similar there are some underlying differences that make accounts receivable financing a clear winner for pricing, flexibility and service. Below, some of the key differences are highlighted.
Funding Differences
Factoring allows you to sell your existing open invoices to a factoring service in exchange for cash. Once you’ve sold those invoices you no longer have to worry about collecting them and there’s no repayment to consider.
On the other hand, a merchant cash advance is a loan against your future sales. Usually, your repayment is debited from your checking account each day or each week.
Both financing options are reliant on your accounts receivable. While you can do a merchant cash advance if you work with invoices, you can’t do factoring without them since factors have to have existing open accounts to collect.
Cost Differences
Here’s the big difference between the two. In factoring, you’ll sell your invoices for approximately 80% of their face value. When you consistently pass on your invoices you never have to worry about cash flow. Your accounts receivable team won’t spend their time chasing down late payments and your business doesn’t have to wait 60 or 90 days for payment to be received. While 20% is more than the cost of a traditional loan, there are significant savings associated with factoring that balance it out.
For a merchant cash advance, rates vary widely, with lenders charging anywhere from 50% APR to well over 300% often with higher rates if you are able to pay more quickly.
The Long Term
It has become more popular for businesses to enter long-term agreements with factoring companies. They find that the cost of factoring is more than compensated by strong cash flow and the elimination of accounts receivable hassles.
Merchant cash advances, like payday loans, should be a one-time, emergency solution, but often the high rates mean businesses get locked into a negative spiral of advances to pay the interest on the previous advance. If your business truly finds itself in a unique situation and you know you will be able to pay back the loan and move on, a cash advance can get you over the hump.
Except in very rare circumstances, if you are a business working with invoices, accounts receivable financing should always win out over a cash advance.
