Why Online Lenders are a threat to Factoring – Part II


One could argue that Merchant Cash Advances are a huge threat to factoring. They have several distinct advantages (and disadvantages) compared to commercial finance companies.

The hoops that a borrower must go through with a factor are several and very operationally intensive.

  • Loan Set up - the borrower must send the finance company their Accounts Receivable, their Accounts Payable, and contra accounts for the factor to underwrite the credit worthiness and assess the willingness of their portfolio of account debtors. It is operationally intensive. With MCA, you send me your historical Credit Card and you can have an advance later today.
  • Security over receivables - The merchant cash advance company may, but does have to obtain a security interest and file a UCC-1 financing statement.
  • Monitoring - Then there is all the work around monitoring the receivable portfolio (receive company’s invoices, stamp invoice with notification, verify the receivables, etc.)
  • Collections - The cash dominion process is very different, as the merchant cash advance company does not typically notify account debtors to redirect payment but is repaid through either taking control of the debtor’s credit card repayment stream or by initiating ACH debits against the borrower’s deposit account.

From a borrower’s perspective, MCA money is easier to get than factoring. While it may cost more (I cannot comment on whether the annualized interest rate is higher than factoring or not), if speed is an issue, factors will have a tough time. If relationship and inventory and purchase order lending are important, then it’s a different ball game.

But probably the biggest difference between MCAs and Commercial Finance is scale. MCA ‘s need diversification to survive, they don’t want to focus on a particular geographical area (ie, restaurants in Chicago) or sector (ie, vegan restaurants). With a diversified portfolio, a downturn in one sector may not hurt you. The scale model is different in that these platforms want to do a lot of $25K deals so that some loss rate doesn’t hurt.

So how do they do that? Many MCAs origination strategy rely on the use of Independent Sales Organizations (ISOs) or brokers. ISO are paid 8% of advance amount (or some percentage negotiated). For example, if you are Joe’s Coffee shop and you get $100K from OnDeck, $8K is going to ISO the day the deal is closed. OnDeck hasn’t earned a nickel but ISO makes their money. If Joe’s Coffee shop goes out of business, OnDeck is out 100K plus the 8K to the broker.

If you think of that model, which is incentivizing the brokers to pump volume, that is not a great underwriting model. ISOs are pure sales organizations. They perform no underwriting. On the other hand, Commercial Finance companies get a lot of business from brokers, but they typically don’t rely on them.

The other challenge is that if a company relying on MCAs in addition to factoring, the factor may no t know this. Since the MCA controls the cash dominion process by initiating debit, this becomes an additional layer of debt. And we all know in a slow economy, more leverage is not good.

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Voices (3)

  1. Jan Rhodes:

    One other consideration I’ve run across with business owners is factoring (moving an invoice funding forward) can leave a revenue gap later that must be solved by factoring another invoice until factoring has become a primary cash flow activity. Then when the Owner is hit with an immediate funding need, Factoring is not a solution.

  2. M. Marin:

    While the writer does point out the differences between the two products, he fails to point out additional benefit a factoring client receives for the funds (receivables management, reporting, credit assistance, credit insurance, etc., etc.). Besides a high cost of funds, what additional benefit does a borrower receive from an MCA?

    1. David Gustin:


      These Networks are information advantaged but relationship and operationally light compared to Commercial Finance companies. While yes Factoring consists of several distinct services: receivables monitoring and collection, credit assessment, payment guarantees and financing, MCAs don’t have those monitoring and collection costs because they are debiting an account via ACH or collecting from a card processor.

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