Differences Between Invoice Factoring and a Merchant Cash Advance (MCA)

Last Updated July 2, 2025

Does your business need fast cash? Funding options, such as traditional loans, can take days, weeks, or even months to secure, leaving you with significant cash flow gaps. Fortunately, there are alternatives to get quick access to working capital.

Invoice factoring and merchant cash advances (MCAs) are popular solutions, but the way they work—and how they affect your business—are very different. From cash flow effects to repayment structure and risk, the difference between merchant cash advances and factoring can make or break your financial strategy.

In this guide, you’ll learn how each option works and what to consider when choosing the right solution for your business, all while keeping an eye on reducing the regulatory risk of merchant cash advances and factoring.

What Is Invoice Factoring?

With invoice factoring, a business sells unpaid invoices to a factoring company at a discount in exchange for upfront cash. Instead of waiting 30, 60, or even 90 days for customers to pay, you can access working capital quickly by converting your accounts receivables into cash.

It’s often confused with other types of funding, leading some to ask, “Is invoice factoring the same as a merchant cash advance?” The short answer is no. While both offer fast access to capital, they operate in very different ways.

How Factoring Works

Factoring is one of many smart strategies for a fast cash infusion. Here’s how the invoice factoring process typically works:

1. A business provides goods or services to its customers and issues an invoice.
2. The business sells the invoice to a factoring company, who then assumes collection responsibilities.
3. The factoring company advances a percentage of the invoice value, typically ranging from 70% to 90%.
4. Once the customer pays the invoice, the factoring company sends the remaining balance to the business, minus a fee.

There are a variety of reasons companies use invoice factoring, from covering payroll to buying inventory to managing cash flow gaps. It’s possible to do all of this without taking on traditional debt, which allows businesses to grow without the limitations of long-term debt.
This method helps businesses cover payroll, buy inventory, or manage cash flow gaps without taking on traditional debt.

Pros and Cons of Factoring

While invoice factoring is a much better option than an MCA, it has its advantages and disadvantages.

Pros:

• Fast access to cash without waiting for customer payments
• Based on receivables, so credit history matters less than customer creditworthiness
• Can improve cash flow stability during slow seasons

Cons:

• While it’s not a loan, fees still cut into profit margin
• The involvement of a third-party could throw off your customer if they aren’t used to working with a factoring company
• Less useful if long payment terms of slow-paying customers aren’t the root of your cash flow issues

What Is a Merchant Cash Advance?

A merchant cash advance (MCA) is a type of alternative financing that provides a lump sum of cash to your business in exchange for a percentage of future sales, typically credit or debit card transactions. While it’s not technically a loan, it acts like one in practice, offering fast access to capital when your business needs it most. Still, MCA fees add up quickly, which can worsen cash flow problems.

If this model doesn’t feel like the right fit, you may want to explore alternatives to a merchant cash advance. You can also explore other cash flow lending options as other alternatives to traditional funding.

How MCAs Work

Here’s how a merchant cash advance typically functions:

1. A business applies for an MCA and is approved based on its daily or monthly revenue.
2. The lender provides an upfront cash advance.
3. Instead of fixed monthly payments, repayment happens automatically through a percentage of the business’s daily credit or debit card sales or through fixed daily withdrawals. You can use an MCA calculator to understand the total cost of borrowing before signing a contract.

Pros and Cons of an MCA

Merchant cash advances have their pros and cons which need to be carefully examined before business owners dive headfirst into this riskier form of financing.

Pros:

• Quick funding, often within 24 to 48 hours
• No collateral required
• Payments fluctuate with revenue, which can ease strain during slow periods

Cons:

• Higher costs than traditional loans or invoice factoring
• Daily or weekly repayments can strain cash flow
• Less transparency on the total repayment amount

Given these drawbacks, companies exploring this route should be mindful of the regulatory risk of merchant cash advances. Many are forced to figure out how to get out of an MCA if or when things go south.

Differences Between Factoring and a Merchant Cash Advance (MCA)

While both options offer quick access to capital, the difference between a merchant cash advance and factoring lies in how they’re structured, how they affect cash flow, and their risk.

In-Summary: Factoring vs. Merchant Cash Advance

When comparing a merchant cash advance vs. factoring, it’s clear that while both offer fast access to capital, they serve very different business needs.

Factoring is best for companies with strong accounts receivable and customers who pay on net terms. This option is ideal if you want to avoid debt and need working capital tied to invoices.

On the other hand, a merchant cash advance provides a lump sum based on projected future sales. It’s helpful if your business doesn’t invoice clients or if you generate revenue through daily card transactions. However, it often comes with higher fees that can put pressure on daily cash flow.

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The Next Step: Choosing a Factoring Company

If factoring feels like the right fit for your business, the next step is finding a reliable partner. Not all factoring companies are created equally, so look for one that offers transparent terms, flexible advance rates, and personalized service.

You should also consider how each provider addresses compliance and risk. Reducing the regulatory risk of merchant cash advances and factoring is more than just smart—it’s essential. A trustworthy factoring company won’t just provide funding; they’ll help you stay compliant, organized, and in control of your cash flow.

That’s where altLINE comes in. As a bank-owned factoring provider, altLINE offers a transparent, relationship-focused approach that helps you grow your business without the confusion or hidden fees of an MCA. Whether you’re new to factoring or ready to make the switch, our team is ready to guide you every step of the way. Feel free to fill out our free factoring quote form or contact one of our representatives at +1 (205) 607-0811. We will happily help answer any questions you might have about the process.

Michael McCareins

Michael McCareins is the Content Marketing Associate at altLINE, where he is dedicated to creating and managing optimal content for readers. Following a brief career in media relations, Michael has discovered a passion for content marketing through developing unique, informative content to help audiences better understand ideas and topics such as invoice factoring and A/R financing.