Who Should Use Merchant Advances or Factoring Services?

Certain businesses can benefit greatly from obtaining a merchant cash advance or using a factoring service.  The type of financing you should seek depends on your industry and business practices. 

You should consider seeking a cash advance if your business:

  • Needs an immediate cash infusion, but is unable to obtain conventional financing at a favorable rate.  Cash advances are typically easier to qualify for and quicker to obtain than traditional business loans.
  • Is seeking flexible repayment terms.  Terms in a cash advance agreement are generally more flexible and open to renegotiation than those of a traditional loan, and are typically paid back quickly.
  • Is currently unable to take on additional credit obligations.  A business cash advance is not a loan, so it will not be reflected on your credit report.
  • Has a steady volume of monthly credit card sales, with sales projected to remain stable or increase.  Most providers require that a business must maintain steady sales to avoid “default” on the agreement. 
  • Will not be severely burdened by repayment of the advance.  Since repayments are a percentage of sales rather than a fixed amount per month, payments will increase as sales volume increases. 
  • Does not own equipment or property to use as collateral for a traditional loan.  Cash advances do not require collateral to “secure” a debt.

Cash advances are used by all types of business.  A reputable provider of small business cash advances or merchant cash advances should be able to assess your needs more specifically.

You should consider using a Factoring Service if your business:

  • Has large amounts in accounts receivable but needs an immediate cash infusion.  A factoring service will purchase these accounts for cash at a discounted rate. 
  • Has customers that are consistently late in payments.  When you sell these accounts, the responsibility to collect is placed on the factoring service.
  • Deals with creditworthy customers.  Fees will be lower if the accounts are not at risk for non-payment.

Most factoring services allow a business to sell only specific invoices or customer accounts, so you will be able to maintain control of a portion of your receivables.

Another important consideration in using a factoring service is your relationship with your customers.  Since the factoring service provider will take over all collection functions of the sold accounts, customers will make payments directly to the factor.  Consider the impacts that this arrangement might have on customer relationships-  you may inadvertently dissuade repeat purchases from formerly loyal customers. 

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