Evaluating Funding Options Can Be a Maze

Successful users of invoice factoring take the time to check out the credentials, the business practices and personal ethics of their potential factoring partner. Since you are entering into a three-party agreement that involves you, your customers and the factoring company, taking enough time to carry out the appropriate “due diligence” is critical. Don’t be shy about asking for customer references and then be sure to speak to three or four of the factor’s customers. Criteria and fees can vary considerable, so total disclosure is the key to a successful factor relationship.

A merchant cash advance (MCA) loan is generally a cash advance based on a company’s historical volume of credit card transactions. MCA is a quick, easy way to get a business cash advance with little to no collateral, even if you don’t have a good credit score. Like factoring, you can get qualified in as little as 24 hours, there is an easy approval process and bad credit is not usually a problem. However, fees are generally higher than with traditional loans or factoring and there is less flexibility to change merchant service providers if the need arises. Additionally, a reduction in daily credit card receipts reduces your daily cash flow.

An Automated Clearing House (ACH) line of credit refers to a system where the lender has the ability to withdraw an agreed upon-amount directly from your business checking account. This is done at agreed upon intervals to repay the line of credit. Instead of looking at your credit card transactions, the lender looks at the average daily balance of your business checking account. The ACH designation applies to how the lender is paid, at agreed intervals which are sometimes daily.

This is different from factoring your accounts receivable, because instead of billing your customers and collecting from them, they directly access your checking account. The cost of the capital is more expensive, but you’ll be able to access that capital much quicker than a traditional term loan from the bank or other financial institution.

Make sure you understand all the fees and terms upfront, and don’t settle for a bad deal for fear of being rejected. A reputable ACH lender will outline all fees and terms to you. A good way to ensure you are getting a fair deal during the comparison process is to ask for an estimate of the annual percentage rate (APR), because the fee structure and costs associated with this arrangement can differ dramatically.

When comparing cash-flow alternatives for your business, it is imperative to weigh the pros and cons of each option. The final decision will have a dramatic impact on your bottom-line and could mean the difference between “Sink or Swim”. Whatever your choice, be knowledgeable, perform your due diligence and only choose a reputable firm with a proven track record.