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Merchant cash advance vs invoice factoring

A merchant cash advance and invoice factoring are two options available to businesses seeking to raise finance. But what are they and how do they differ? What are the advantages and disadvantages of each? 

Merchant cash advance 

A merchant cash advance, sometimes known as a business cash advance, is a loan where the lender receives repayments via a share of the payments made by the business’s customers on debit and credit cards.


It can be easier to obtain than many other forms of business finance, especially for businesses that have a limited credit history or who have few assets that can be used as security. Credit checks will not normally be carried out by a lender before approving an application for a merchant cash advance. 

The repayments fluctuate according to the volume of card transactions being carried out. This should mean that higher repayments are made when business is good and that less needs to be repaid when business is poor. 

The lender will work with your card terminal provider and will automatically deduct the repayments when a transaction takes place, so the loan repayments will never appear on your bank statement. It doesn’t matter whether your card transactions happen in-store or remotely – merchant cash finance is still suitable. The typical amount claimed by the lender might be around 15% of the cash value of the transaction. 

Typically, the advance is repaid over a period of just six to 10 months. 

It is often possible to complete an application for a merchant cash advance within 24 hours. 


It may only be suitable for businesses whose customers regularly use debit and credit cards to pay for the business’s goods or services. Indeed, many lenders specify that businesses must have a minimum monthly level of debit and credit card transactions for an application to be considered. 

The lender will still carry out affordability checks to ensure the business can repay the loan.

Lenders might also restrict the loan amount to a certain percentage of the business’s turnover – receiving a loan equivalent to one month’s turnover is not unusual. 

This form of funding often has higher application fees than some other business finance options. 

Some lenders only work with a limited number of card terminal providers. This means that your choice of providers could be restricted. 

Merchant cash advances are often considered to be an expensive cost of the product. You will typically pay between 9% and 50% more than the amount of your investment, frequently over a short period of time. Merchant cash advance businesses calculate the amount you must return by multiplying the amount of funding by a factor or multiplier. 

To find out more about merchant cash advances, get in contact with the team at Funding Bay. We work with a roster of lenders such as Merchant Money, 365 Business Finance, or FIBR who offer Merchant Cash Advances. To find out more ring in for a free consultation.

Invoice factoring 

With invoice factoring, the business effectively sells its invoices to the factoring provider (also known as the factor) in exchange for a lump-sum payment. This payment will cover the majority of each invoice value – 80% might be a typical figure.  

The factoring company then pursues your customer for payment of the full amount of the invoice. When payment is made, the remaining portion is paid to you, minus the factor’s fee. For example, if you received 80% as an upfront payment, you might then receive 16% of the invoice value at a later date, while the provider takes the remaining 4% as a processing fee. 


Many smaller businesses struggle to get their invoices paid on time, which can lead to significant cash flow difficulties. However, this problem is alleviated with invoice finance, where a significant portion of the invoice value is paid immediately by the factor. 

With a third party chasing the invoices on your behalf, this gives you more time to concentrate on what you do best, i.e. running your business. 

If you wish, you can include insurance against non-payment in your agreement with the factoring provider, although they will charge a higher fee if you choose to do so. With what is known as a ‘non-recourse facility’, the factoring company will absorb the cost of any unpaid invoices, but otherwise, your business will need to bear the costs of unpaid invoices. 

There are more than 100 factoring companies active in the UK, from high street banks and challenger banks to other providers which specialise in invoice finance. 

Invoice factoring is often available to businesses whose credit history prevents them from obtaining bank loans. 


Some providers say that businesses must have a fairly significant turnover, say a minimum of £500,000 per year before they are eligible for invoice finance. However, some of the niche factoring companies specialise in lending to smaller businesses. 

Invoice finance can’t be used via a ‘pick and mix’ approach – either you outsource your entire invoice processing function to the factoring company, or else you don’t use this facility at all. 

Your customers will usually be told that you are using the services of a factoring company. 

To find out more about invoice factoring, get in contact with Funding Bay for a free consultation. We work with a roster of invoice finance lenders such as Close Brothers, Hitachi Finance, Ultimate Finance who can get your business invoice finance factoring.

To discuss if invoice factoring or merchant cash advances are best for your business, get in contact with Funding Bay.

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Please pop your details in the form below and we’ll get back to you within 24 hours.

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