Invoice factoring has been around for a long time and has proven itself to be a valuable tool to increasing cash flow for businesses, but is it limited when compared to the flexibility of the Merchant Cash Advance (MCA) lenders?
With Wells Fargo funding one of the largest players in the MCA space, Can Capital, and others popping up daily with similar services, what is one to think?
The lending space always gets creative when there is too much money on the side lines created by a generous Federal Reserve over the years and little place to employ it safely. Foreign markets are tough and mortgages are way over done…so how do banks compete with factors when they know our product is not scalable? Simple, the banks and other lenders have created a new hybrid business loan product that blends a business credit card with hints of structure borrowed from invoice factoring companies for financing the millions of businesses they cannot reach.
So do we fear it or becoming a fan of the MCA product?
If we break down the MCA product, it cannot go very high on the dollar amount if it is to remain scalable. We have to remember that this is a credit card with lipstick and driven by numbers and smart systems…not by lenders that manage portfolios like factoring companies or commercial lenders.
The MCA product can also sort of be annoying to businesses because the borrowers’ business accounts will be debited daily in most cases for a payoff in 6-12 months. Therefore, principal pay back is stiff and fast.
The interest rate that Can Capital and others use is also typically around 36% when annualized, so pricing is worse than a mainstream invoice factoring company’s financing.
On the other hand, factoring is quite the opposite of an MCA loan in many respects. Its lending lines are not restricted to $200,000 typically, but rather can be in the millions. I never thought I would say this, but, the factoring repayment is patient compared to the MCA lender. Our repayment comes when the client’s customer repays our invoice, not every day whether the invoices have been paid or not.
I think factoring companies could be a fan of MCA lenders as they are filling a working capital niche that in most cases is symbiotic to the invoice factoring company.
I would love to know what you think…comments welcomed.
Author: Stephen Perl, CEO
Author: Secrets of Doing Business with China: Dancing with the Dragon (2012) (Amazon)
Stephen M. Perl, MS, MBA is the CEO of 1st PMF Bancorp, a leading US commercial bank lender, and the founder and CEO of ChinaMart® Los Angeles, a platform that assists Chinese companies in their investment in the USA.