Stephen Perl, by Professional On-site Executive Headshots in Los Angeles and Orange CountyInvoice 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

1st PMF Bancorp – invoice factoring 

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.


  1. Stephen, thanks for your comments on this important issue. There are many issues related that CFA is trying to get it’s arms around. Please let me know if you’d like to serve on an informal discussion group relative to this with some other factors and entrepreneurial lenders. Michelle or Eileen at CFA can give you my contact information. Thanks, Pat Trammell

  2. Stephen, I’ve been in the Commercial finance industry a long while and have had my share of bumping up against the challenges associated with MCA lenders for the past few years. I was personally surprised to see how many Merchant lenders are available to the business owner and the various ways they are going to market in order to secure their business. Always interested in reading articles such as yours. Thank you for your insight!

  3. Great article. I have definitely seen the working capital lenders take a good chunk of the factoring business over the last year. It seems to have no boundaries right now and the lenders are everywhere. These two types of funding are distinctly different in that WC provides additional capital and factoring simply provides acceleration of funds already owed to the client. For Pinnacle Specialty Capital, we decided if you can’t beat them, join them, so we are now offering a WC product along with our factoring and equipment finance. I still try to steer my clients away from the WC loans for the reasons you mentioned and I fear that these loans are not sustainable in the long run, but time will tell. For now, I am just happy that our small businesses have some options that were not previously available. I just hope they can use it responsibly.

    1. Thank you. I understand your position and I have been in the invoice factoring business for over 20 years now so I can start to see some trends. I feel MCA is still a new product, but even though it is limited in advance amounts, it has the advantage of adding a little extra to the pot. Both products could be symbiotic if a lender has the right discipline…on the other hand, it could also spell trouble if the MCA advance is too high and leaves the client cash flow strapped even with invoice factoring. Sounds like you guys are on top of it.

  4. I think that MCA loans can serve a great purpose if used correctly. What scares me the most is when I see so many of these lenders in 2nd, 3rd, 4th …. or even 9th position with insufficient collateral to secure such a crazy advance. If a business owner is having cash flow issues today, it is only a matter of time before the MCA money runs out and someone is caught holding the bag!

  5. I agree with you but I also feel that the market will correct itself like it has in the past. About 10 years ago, a little before the 2008 melt down, there were factoring companies popping up left and right with hedge funds and large investors that had lots of money to deploy. They got burned and disappeared. That same investor money that was on the sidelines then is now back and deploying in the form of crazy MCA lenders that you are describing. Many will get burned and they will disappear as well. Give it approx 2 yrs and there will be a few consolidated lenders with a couple big players backed by our friends at Wells and a few other banks who will eventually own the world anyway 🙂

  6. I have been in and out of the MCA business since the beginning. I believe it has been around 15-20 years. I have seen many come and go in this business. I can assure you that just like factoring or any other business; there are good and bad players in the game. I like the two that we resell for one of which is preferred and both have been in business for at least 5 years. Both have good BBB ratings and no issues, really, if you did a web search on them. We lead with MCAs. I actually detest the term and prefer Receivable Purchasing or some of the other terms I’ve seen lately.

    In addition, we offer factoring, PO funding and ABL and SBA loans. We think that the best thing is sell to the merchant, or business owner, what is best for them in this place and time. Sometimes it is a SBA loan and other times it is a MCA. We do not steer one over the other and do not charge any upfront fees for placing them with one of our partners. Sometimes that is a requirement from the funding partner sometimes it is not. We decided that this was best for the prospect and it keeps us on our heels to analyze and move–forward with the prospect or to the next prospect.

    The truth is that the market has had plenty of time to offer a low cost of capital for the risk that is involved in funding these risky ventures. Plenty of time. If you can offer bank rates (heck or even factoring rates for that matter) as we offer on SBA loans for the associated risk, while sustaining your business, you would likely put all of us out of business. Or at least you would leave us with just the C, D, E, F paper.

    American Express is in the game and advertising it. Of course, never using the term, MCA. We have a better product than Amex. JP Morgan Chase is working with a company that offers a loan type or MCA product. I think private equity and hedge funds are financing our partners. I haven’t a clue. Heck, maybe it is Wells. The point is that most people like the taste of sausage but few of us want to work in the processing plant or even see it made. This is sausage making.

  7. Factoring like an ABL facility leverages collateral to provide working capital and do speed up cash flow, which most businesses need to run their daily operations. Unlike the MCA, which is an infusion of cash for a short period of time, repaid daily whether the company can afford it or not. Business owners are thinking short term when the enter in to the MCA plan and not how it is going to affect them today or even tomorrow.

    As a fairly new product, with much publicity, the MCA should not be compared to factoring which has been providing the cash flow availability to business owners for decades. Tried and true, factoring serves a purpose and can help a business right themselves and survive. If a business fails, it is usually due to management/ownership. Whereas the MCA helps solve an immediate solution and may cause other problems later.

    MCA, Crowd Funding, whatever the alternative financing is called, the long term affects haven’t played out completely yet. A good alternative for some if money management is on track, but once that UCC lien is filed and money transfers hands, the daily payback, and lack of additional working capital strains a business even more. So many small businesses use credit cards, corporate or personal, max them out and struggle to pay them down.

    Instead of one or the other, maybe the decision should be working capital line first and if allowed by 1st lender, then MCA can be considered for projects, etc., almost like a mezzanine loan. Have a plan, don’t jump in blindly and know the purpose of why those funds are needed. And hopefully, the business owner doesn’t run out to purchase luxury items with these advances.

  8. We DO NOT approve anyone that we think WILL NOT have the ability to pay us back. Period. I have never known a factor that approves retail businesses as a client. Factoring is exclusively a B2B instrument and not a B2C one. We now offer a Receivable Purchasing product to B2B as well. In addition we offer a traditional factoring product through a funding source(s) as well.

    If a business fails with a factoring relationship a traditional bank may accuse the factor for the same short sightedness that you accuse a MCA of. At least you said “may” cause a problems later. I have spoken to many who believe that factoring is the devil and some of them were traditional bankers. I am amazed that there is still this level of ignorance regarding factoring.

    Any business, considering any form of financing for their business, should have a plan. The fact that the cost of capital is higher for a Receivable Purchasing product means that the plan is even more important. However, their business skills should not be defined by the cost of capital of the instrument but for the importance of due diligence when receiving capital from an entity that charges for the use of their capital.

    We do not believe in “stacking.” We like to empower our clients to come up with a plan to make Receivable Purchasing work for them rather than chasing their tales. We love working with their accountants, lawyers and/or financial advisors to help them to decide whether this is a good option for them.

    We have seen clients grow their businesses from one location to multiple locations and in some cases even if they become bankable choose to work with us. Compared to factoring this instrument is a teenager and learned to walk (walking the talk) many years ago.

    We do not see this as crashing the party of alternative financing but as an invited guest that is joining it while bringing gifts (more tools) to the host.

  9. Stephen,

    You are on point about the relationship between Factors and MCAs. We have a symbiotic relationship with them. We put money in and they take money out. We help their customers cash flow and be better able to cover the cost and they help our customers cover large outlays of cash, that is needed to create an invoice. The simplicity of the MCA is what is drawing people to it. People forget that this product has been around for a long time (15-20 years) but recently evolved beyond just taking credit card customers (B2C). Prior to that evolution, there were very few MCAs. Now everyone wants to get into the game to earn those rates. There will be consolidation and lower rates in the next few years, much like the factoring world has experienced.

  10. It would appear that MCAs are maturing into their position in the finance world. As they do that, it would appear that mostly the rules of the wild west dominate for the time being. Eventually states’ attorneys and maybe the US government might come up with some “protection” rules. Until then it is a shoot out.

    As a turnaround consulting firm focused exclusively on lower middle market and small businesses, we have become subjected to the dark underside of the MCA market more and more. I hear about well structured MCA deals, but obviously from our perspective we do not get to see those deals. So my opinion may be somewhat biased. What I can tell about MCAs is that it is a product that can serve a purpose. The problem we are seeing is user education. And by “user’ I mean not only the borrowers, but also the MCAs themselves.

    The MCA premise is that they can predict a company’s cash flow with limited data and algorithms, lowering the time and cost of underwriting. The presumption is that the past will repeat itself. Yet, responsible MCAs mention that this product is more like a project finance tool. By its very nature something is going to change from the use of MCA capital. So the future is important to the MCA, but it appears to be a question not asked by the MCAs that we have run into. More interestingly, the MCAs we have dealt with are as shocked (but somewhat prepared) when their client cannot repay the loan. This creates an ugly tension that is not necessary to play out so often. That tension and the resulting down side are what is tarnishing the MCA market.

    Most of our clients used the MCA loan not for a project, but rather to desperately cover a working capital hole in their immediate cash flow. I understand that responsible MCAs do ask for projection and feasibility information before lending. Those that do not, deserve the reputation they are getting as liquidators. This gap in knowledge only underscores the user education comment. MCA models that we have seen do not have visibility to the future and therefore those MCAs are likely to be taken advantage of by the desperate company that knows few questions will be asked. We like to think that 13 week cash flow models would solve most of this problem (we are admittedly biased). However, few, if any MCA clients know how to or have the time to do themselves.

    So this lack of information creates a lairs poker game (apt, since some of this money is coming from Wall Street these days) putting both the MCA and their client in a difficult situation. Both the MCA and the client in these scenarios then look for a way out – survival instincts take over and we look for someone else to invite to this liar poker game. And the answer is another MCA, because with no cash flow plan and no one asking at the next MCA, the “stacking” process begins like some form of ponzi scheme. It eventually has to end in liquidation and because there is no money left over, usually an individual owner filing a chapter 7.

    As the industry matures, this mutual abuse likely will subside or become the odd sad tail. However for right now, the rules of the wild west prevail and the MCA participants have the potential to make this look like the next sub-prime bubble market.

    The laws of physics and turnarounds still apply in the MCA world. Ask the question – does this client have a reason to exist and how am I helping them get there. If the answer is fuzzy, think again about what you might be doing to yourself as an MCA, your client and how one day you may have to explain this advance to an attorney general.

    Hope this helps and good luck…

  11. Hi Stephen:
    Not sure how you came up with an estimated 36% IRR, but you are low. I am happy to walk you through the correct calculation as I have been in ABL,factoring and MCA for many years.

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