How each one works, step by step
| Step | Invoice factoring [1] | Merchant cash advance [2] |
|---|---|---|
| 1 | You sell an unpaid invoice to a factoring company | You agree to sell part of your future receivables |
| 2 | It advances part of the invoice, sometimes up to 90% | You receive a lump sum, sometimes the same day |
| 3 | It collects from your customer | It collects a holdback of card sales, often 5% to 20%, or a fixed daily or weekly debit |
| 4 | It sends you the rest, minus its fee | Collection stops when the agreed total, the advance times the factor rate, is paid |
Factoring fees run about 1% to 5% of the invoice value per month [1]. The key difference is whose money pays it back. In factoring, your customer's payment on an invoice you already earned settles the deal. In an advance, your own future sales do. That makes factoring tied to work already done, and an advance tied to sales you have not made yet.
What $10,000 costs each way
The two are priced differently, so put them in dollars. NerdWallet's factoring example: a $10,000 invoice, an 85% advance and a 3% fee per 30 days. If your customer pays in 30 days, the fee is $300 and you receive $9,700 in total, an estimated APR of about 42.35% [1].
| Scenario | Cost in dollars |
|---|---|
| Factoring, 3% a month, customer pays in 30 days [1] | $300 |
| Factoring, 3% a month, customer pays in 60 days [1] | $600 |
| Factoring, 1% to 5% a month, one month [1] | $100 to $500 |
| Advance at a 1.1 factor rate [2] | $1,000 |
| Advance at a 1.5 factor rate [2] | $5,000 |
Two things move these numbers. Factoring fees keep running while the invoice is unpaid, so a slow customer doubles the cost from 30 to 60 days [1]. An advance's dollar cost is fixed by the factor rate, so paying it back faster does not save money unless the contract gives an early payoff discount; it only raises the estimated APR. Extra factoring fees, such as service, monthly minimum and origination fees, add to the factoring rows [1].
Price your own offer with the MCA calculator or put both side by side in the offer comparer.
Contract terms to check in each
Both products are written as sales, but the paperwork you sign is very different.
| Term | Invoice factoring | Merchant cash advance |
|---|---|---|
| If the money never comes in | Recourse: you repay the factor. Non-recourse: the factor takes the loss, for a higher fee [1] | Ask whether payments adjust to real sales through reconciliation |
| Who talks to your customers | The factoring company collects from them [1] | No one; collection comes from your account or card processor [2] |
| Court rights | Read the dispute and venue terms | Many require a confession of judgment, which waives your right to defend yourself in court [2] |
| Liens | A sale of accounts falls under UCC Article 9 [5], so the factor may file a UCC financing statement | Ask what the funder files against your business |
A confession of judgment is a reason to stop and read
NerdWallet notes many advance providers ask for a confession of judgment at closing [2]. If you sign one and fall behind, the funder can get a judgment without you having a chance to dispute it. Ask for it to be removed, and get legal advice before you sign one.
A third option: invoice financing, where you keep collections
If you like the idea of turning invoices into cash but do not want a factoring company contacting your customers, there is a middle path. With invoice financing, you use unpaid invoices as collateral for a loan or line of credit, and you stay responsible for collecting from your customers [1]. When the customer pays, you repay the lender plus fees and interest [1].
| Invoice factoring | Invoice financing | Merchant cash advance | |
|---|---|---|---|
| Is it a loan? | No, a sale of invoices [1] | Yes, a loan or line backed by invoices [1] | No, a purchase of future receivables [2] |
| Who collects from customers | The factoring company [1] | You [1] | No one; collected from your sales or account [2] |
| Best for | Slow-paying business customers | Owners who want to keep the customer relationship [1] | Card-heavy businesses that need cash fast |
NerdWallet notes invoice financing may be the more affordable choice when your customers pay on time and you have a strong relationship with them [1]. All three are faster to get than a bank loan, and all three are worth pricing in dollars before you choose.
What New Jersey owners should know
New Jersey regulators have acted against advances that worked like disguised loans. On January 3, 2023, the New Jersey Attorney General announced a $27.375 million settlement with Yellowstone Capital and related companies, over allegations that they lured small businesses into predatory lending arrangements disguised as merchant cash advances [6].
Federal credit rules also treat factoring differently. Under Regulation B, credit tied to a factoring agreement is excluded from the faster notice rule that covers most small business applications, so if you are turned down, you get written reasons only when you ask within 60 days [7]. Read our guide to New Jersey MCA law for the state rules on advances.
This is general information, not legal advice, as of Oct 20, 2026.
How to choose between them
- Do you send invoices to other businesses? If not, factoring is off the table.
- If you do, is the gap caused by slow-paying customers? Factoring fixes that directly, usually at a lower cost.
- If the gap is not about invoices, compare an advance with a line of credit first; lines run 10% to 99% APR [3], below the advance range.
- If an advance is the only option, get the total payback in dollars, the collection method and an estimated APR in writing, and price it before you sign.
Business Funders shows both options in dollars. Our quiz matches you to the ones your numbers fit, with the cost of each shown side by side.