The explosion of cash advance loans or unsecured debt loans over the past few years have increased the awareness of working capital accessibility. By the very nature of the returns on these loans, lots and lots of new companies have been started to cash in on the craze. This should be seen as an indicator to small businesses who are paying for all this expansion.
These cash advance companies can be separated by ones that come from a commercial finance background and then those coming from the tech world industry using latest app technology to target businesses. Both types of lenders run the spectrum of backers. Some at one end have millions of dollars of equity and are even publicly traded. Others are tech startups who think they either have a new way to attract borrowers or a new way to process loans.
One of the byproducts of all this capital investment is a tremendous marketing push. Small businesses are being inundated with robo calls and emails asking if they need working capital. The competition within the Merchant Cash Advance (MCA) industry is white hot. And with any explosive unregulated situation regarding money, there are good players and others, not so good.
What does this have to do with the actual small business owner who is looking for working capital to grow? I am not suggesting that all forms of unsecured debt products are bad or wrong to use. The point is, like any form of capital, whether equity or debt, the proper investigation needs to be given to the decision to choose one over the other.
Factoring is usually an ongoing funding relationship where over a period of time funds are advanced against invoices and retired from customer payments. Normally a borrower does not have to requalify to increase the size of the invoices being funded. MCA's as a transaction are one-time events. A small business qualifies for a loan amount and then makes automated payments on that loan. MCA's can be renegotiated and in some cases layered one on top of the other, but that becomes a fresh transaction where the borrower has to qualify to secure.
Both factoring and MCA/ACH companies, being unregulated, are initially created by individuals who create the terms and conditions as they see fit. These terms and conditions are subject to change as the lender figures out what is working and what is too risky. The difference is, the factoring industry is many decades old and there is a somewhat normal course of business so it is easy to gauge how one compares to another. The MCA/ACH industry is younger and going through growth pains so some of processes have not been tested yet, and as I mentioned above, some of these companies do not come from a commercial finance background so the underwriting and due diligence might not be standardized. The result of this could potentially be a shake out where the weaker lenders end up in a rut.
By any calculation a factoring company will charge much less for providing working capital than a MCA/ACH arrangement. The cash advance industry touts the speed to funding, meaning they will deposit a check in your back account within days of an application (provided you qualify.) But after the initial application process, a factor can also fund an invoice on the same day or next day of it being submitted for factoring.
Most importantly, in my mind, is the attention to your success. A cash advance company is only interested in your ongoing viability as long as they can pull automatic deductions from your company bank account. On the other hand a factoring company is providing services that will have a direct and ongoing positive effect on your business over a longer period of time. The process of delivering funding on a regular basis means checking in and remaining involved in how your company is doing.
Bear in mind, invoice factoring is not for every business situation and MCA/ACH cash advance loans originally were specifically for retail situations like stores and restaurants where credit cards are the primary form of payment. But as far as cost of funds, flexibility, speed, mentoring, assisting with solicitations, customer verifications and creditworthiness - receivables factoring is a worthy solution for B2B and B2G types of companies.
Company: Creative Capital Associates Factoring Co. Oct. 8th, 2015