What is the difference between factoring and a merchant cash advance?
Both are usually structured as purchases rather than loans, but they buy very different things. A factor buys specific, existing invoices owed to you by your business customers and gets paid when those customers pay. An MCA provider buys a share of your future receipts, all money coming into the business, and collects it by debiting your bank account daily or weekly.
That difference in what is purchased drives everything: cost, cash flow, risk and what happens when sales slow. Factoring is tied to work you have already done. An MCA is tied to revenue you have not earned yet.
How do factoring and an MCA compare side by side?
The table reflects typical market terms. MCA terms vary widely between providers.
| Feature | Invoice factoring | Merchant cash advance |
|---|---|---|
| What is purchased | Specific unpaid B2B invoices | A percentage of future receipts |
| Pricing | ~1%–5% of invoice per 30 days | Factor rate, commonly ~1.25–1.50 of the amount advanced |
| Approximate annual cost | Often ~15%–60% on cash advanced | Often triple digits as an APR |
| Repayment | Customer pays the invoice | Daily or weekly ACH debit from your account |
| If sales slow | You factor fewer invoices; no fixed payment | Debits often continue unless reconciled |
| Approval basis | Customer credit | Bank deposits and cash flow |
| Speed | About 1–3 weeks to first funding | Often days |
| Grows with sales | Yes | Only through renewals or new advances |
| Stacking risk | Low; one factor owns the receivables | High; multiple advances on one account are common |
How do you convert an MCA factor rate to an APR?
To estimate the APR of an MCA, start with the total payback (advance × factor rate), divide by the number of payments, then solve for the interest rate that makes those payments equal the amount you received. That is the same math used to disclose a loan APR. The shortcut most owners use, (factor rate − 1) ÷ term in years, badly understates cost because the balance amortizes daily from day one.
Take a $100,000 advance at a 1.35 factor rate, repaid over about six months, or 126 business days. Total payback is $135,000, so the daily debit is about $1,071. The simple shortcut says 35% ÷ 0.5 years = 70%. The actual APR, accounting for the fact that you start repaying the next day, is roughly 126%.
| Factor rate | Term | Total payback | Daily debit | Approximate APR |
|---|---|---|---|---|
| 1.25 | ~9 months (189 days) | $125,000 | ~$661 | ~62% |
| 1.35 | ~6 months (126 days) | $135,000 | ~$1,071 | ~126% |
| 1.40 | ~5 months (105 days) | $140,000 | ~$1,333 | ~170% |
Origination fees deducted from the advance make the real APR even higher, because you repay the full payback on less cash received. The MCA vs. factoring tool calculates this for your exact numbers.
How does repayment work, and why does it matter for cash flow?
MCA repayment comes out of your bank account every business day or week, whether or not your customers have paid you. For a B2B company with net 45 or net 60 terms, that is the core problem: you are paying the MCA daily out of money that will not arrive for weeks. Many owners take a second advance just to cover the debits of the first. The cash gap calculator shows how much cash your receivables are holding hostage.
Factoring repayment is built around your customers’ payment cycle. You get an advance when you invoice, your customer pays the factor on its normal terms, and the factor sends you the rebate. There is no daily debit and no fixed payment schedule. If a slow month means fewer invoices, you simply factor less.
Many MCA agreements include a reconciliation provision that is supposed to adjust payments to actual receipts. In practice, owners often find reconciliation slow or hard to obtain, so read the clause and ask how it works before relying on it.
What is MCA stacking, and why is it dangerous?
Stacking is taking a second, third or fourth MCA on top of an existing one, usually from different providers. Each new advance adds its own daily debit, and the combined withdrawals can consume a large share of revenue. Because each provider usually files a UCC lien on receivables and future receipts, the liens stack too.
Stacking is how many owners end up in a cycle where most new advances go to paying old ones. It also complicates a refinance, because every MCA holder needs to be paid off or agree to release its lien before a factor can take first position on receivables.
What is a confession of judgment in an MCA agreement?
A confession of judgment is a clause, used in some MCA agreements, in which the business and often the owner agree in advance that the funder can obtain a court judgment without a lawsuit if the agreement is breached. If triggered, it can lead quickly to bank account freezes or levies.
Use of these clauses has narrowed. New York, where many MCA agreements were historically filed, changed its law in 2019 to restrict filing confessions of judgment against businesses and individuals located outside the state. Rules differ by state and continue to evolve, and not every MCA agreement includes one.
If your agreement contains a confession of judgment, or you have received notice of a judgment or account levy, talk with a qualified attorney before you miss a payment or sign anything new. FactorRoute does not provide legal advice.
Do not stop paying an MCA, change bank accounts or block debits as a strategy without legal advice. Those actions can trigger default provisions and make a refinance harder.
How do you move from an MCA to factoring?
Moving from MCA to factoring works when your receivables are strong enough to cover the MCA payoff and still leave operating cash. The factor typically uses some or all of the first advance to pay off the MCA balance in exchange for a lien release, then funds your invoices going forward.
The key number is the gap between what you owe the MCA providers and what your eligible receivables can support. If you have $300,000 of current invoices to creditworthy customers and $140,000 of MCA balances, a factor advancing 85% could make $255,000 available, enough to retire the MCAs and leave working capital. Many MCA providers will accept a negotiated early payoff, especially when the alternative is a struggling merchant.
This is one of the specialty situations FactorRoute routes regularly. See MCA refinance for the process, and if you sell mostly to consumers rather than businesses, know that factoring is not the right tool. Start with the MCA vs. factoring tool to see your real cost side by side.
Step by step
- List every MCAGather each agreement, current balance, daily or weekly debit, and the UCC filings against your business.
- Pull your AR agingIdentify current invoices owed by creditworthy business or government customers.
- Compare payoff to availabilityEstimate eligible receivables times a typical advance rate and compare with total MCA payoffs.
- Get payoff lettersThe factor or you request written payoff amounts and lien release commitments from each MCA provider.
- Close and redirectThe factor pays off the MCAs from the first funding, files its UCC and notifies customers to pay the new remit address.
Illustrative scenario
A distributor trading three MCAs for one factoring facility
A building-materials distributor with about $250,000 a month in sales to contractors and retailers had stacked three MCAs. Combined daily debits ran near $3,100, while customers paid on 45-day terms. The owner was taking new advances to cover old ones.
- The distributor had roughly $380,000 of current receivables, about $330,000 of them owed by customers a factor would approve.
- Remaining MCA balances totaled about $175,000; two providers agreed to discounted early payoffs.
- A factoring facility advanced 85% on approved invoices, or about $280,000, and paid off all three MCAs at closing in exchange for lien releases.
- Ongoing pricing was quoted at a tiered fee starting around 2% for the first 30 days.
Outcome: Daily debits stopped. About $105,000 of the first funding remained for operations after payoffs, and new invoices were funded within a day or two of submission, matched to the customers’ payment cycle.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Is factoring cheaper than a merchant cash advance?
For most B2B businesses, yes, often by a wide margin. Factoring commonly costs about 1% to 5% of invoice value per 30 days, which is often 15% to 60% annualized on cash advanced. MCAs commonly price at factor rates that translate to triple-digit APRs once daily repayment is accounted for.
How do I calculate the APR on my MCA?
Multiply the advance by the factor rate to get total payback, divide by the number of payments to get each debit, then solve for the rate that equates those payments to the cash you received. A spreadsheet IRR function does this. As an example, a $100,000 advance at 1.35 repaid over 126 business days is roughly 126% APR.
Can a factor pay off my MCA?
Often, yes, if your receivables are strong enough. The factor uses part of the first advance to pay off the MCA balance in exchange for a release of the MCA provider’s lien, then funds invoices going forward. It depends on the size of your eligible receivables relative to your MCA balances.
Why do MCA providers debit my account every day?
An MCA is structured as a purchase of a share of your future receipts, and daily or weekly ACH debits are how the provider collects that share. The debit is typically a fixed amount meant to approximate a percentage of sales. Factoring does not work this way; your customers pay the invoice directly.
What is MCA stacking?
Stacking is taking additional merchant cash advances while an earlier one is still outstanding. Each adds its own debit and often its own UCC lien, which can consume a large share of revenue and complicate any refinance. It is one of the most common reasons businesses look to switch to factoring.
Can I get factoring if I have an MCA lien on my receivables?
Usually only if the MCA is paid off or the provider agrees to release or subordinate its lien. Factors require first position on the receivables they buy. A factor experienced in MCA consolidations can coordinate payoff letters and releases as part of closing.
Is factoring available to businesses that sell to consumers?
Generally no. Factoring relies on invoices owed by creditworthy businesses or government agencies. Retailers, restaurants and other consumer-facing businesses without B2B receivables usually are not a fit for factoring.