MCA or Factoring — Similar Speeds, Different Risks

When facing short-term cash flow issues, construction companies have several funding options available. However, after learning the disadvantages to traditional bank loans they often turn to MCAs. But there are specific times when invoice factoring is a much better alternative. When is that?

A Reminder… What Exactly is Factoring?

Like the Merchant Cash Advance, Invoice factoring also offers quick access to temporary working capital over both waiting on client payment or working with banks. Unlike the MCA, which is a loan, Factoring involves the selling or your yet-to-be-paid invoices. The factoring company will “advance” a percentage up front, then return the remaining percent after your client pays them (less their fee).

An example – your business lands a contract to pave the parking area of the new green space in your town. You complete the work and submit your invoice to the city. But because they typically take 60 to 90 days to send payment, you are going to have difficulty paying your team. Applying and (hopefully) receiving a bank loan will simply take too long. Enter factoring.

Banking vs Factoring — Construction-specific Comparison

Aspect	MCAs	Factoring Companies
Application Ease	Minimal paperwork: business financials, personal financials, business licenses/permits, etc.	Minimal paperwork: business financials, personal financials, business licenses/permits, etc.
Speed of Application & Funding	Fast. Account setup: a few days. Funding: as quick as same day.	Fast. Account setup: a few days. Advance funding: as quick as 48 hours.
Viability	Works well with industries with predictable, regular credit card payments to their bank accounts such as restaurants.	Works well with service industries like construction, trucking, and staffing.
Funding Amounts	Based on the amount that the MCA company predicts that you can afford	Based on invoice amount so hypothetically unlimited
Fees and Rates	Often very high loan rates. Added fees vary widely among vendors.	Higher than traditional loans.
Credit Requirements	Based on the history of deposits into your bank account.	Primarily based on your client’s credit.
Credit Score	Because it is a loan it can affect your credit rating.	No impact on credit score
Collateral Requirements	No collateral need. Your future sales act as the collateral.	No collateral need. The invoices act as the collateral.
Client Relationship	Your clients unaware of the loan.	The factoring company works with your client — advance communication is advised.
Additional Concerns	Payments are automatically pulled from your bank account, often weekly or biweekly… dangerous during financial volatility.	Because factoring is a purchase not a loan, your credit rating will not be helped (or hurt).
Additional Helpful Services	None. Limited to financial services.	Additional services are sometimes available like lien compliance or risk management

Both MCAs and factoring have their place in the financial arsenal of small businesses like construction. Knowing which to choose and when is the key.

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