B2C Factoring: How Does B2C Factoring Work?

Most invoice factoring lenders prefer to deal with B2C or B2G companies. Since they’re assuming the risk of collecting on invoices, factoring companies want to work with borrowers that have the most reliable customers. Obviously, plenty of business-to-consumer companies could benefit from more lenient credit and faster access to cash that factoring can offer. Still, finding a B2C factoring company will present a challenge.

Instead B2C businesses might consider other types of funding that are sometimes classified as factoring but different than accounts receivable factoring. They’re not based on accounts receivable invoices but instead, on anticipated future revenue. Take a moment how MCA and ACH funding options compare to invoice factoring.

How Do MCA and ACH Funding Work for B2C Businesses?

With invoice factoring, businesses sell invoices for services or products that they’ve already delivered. Typically, they subtract a processing fee and get most of the rest upfront. B2C businesses typically charge their customers at the time they deliver a service, so they don’t accumulate accounts receivable the same way. That’s one reason why MCA and ACH factoring offer a better solution for companies that conduct business with the public and not through contracts with other companies or government departments.

MCA Factoring

MCA stands for merchant cash advance. It represents a sale of a percentage of a merchant’s future credit card receipts until the loan terms are settled. Since it’s a sale of a percentage, it’s somewhat flexible. For instance, the merchant won’t have to pay as much if business drops during a payment period.

Depending on terms, repayment might work in one of two ways. Sometimes, the credit card processing company will agree to send the MCA factoring company their share. In other cases, all deposits go to an account that the factoring company controls, and the factoring company will send the merchant their share back.

What is the MCA Rule of Thumb?

According to Paragon Financial, merchants should consider the “MCA Rule of Thumb” when deciding upon this kind of factoring. It states that a merchant should anticipate profits greater than factoring fees during the repayment period. If no, MCA factoring won’t be helpful. With this rule in mind, MCA cash advances should go for high-profit investments, like investing in a new location or critical equipment.

ACH Factoring

ACH factoring works similarly to MCA factoring. Instead of using credit card receipts, it’s based upon bank deposits. So, the factoring company will take payments directly from the merchant’s bank account periodically, which could be daily or weekly. It relies on fixed fees, rather than a percentage of receipts.

When Should Businesses Consider ACH and MCA Factoring?

In contrast to loans, both of these funding options depend more upon anticipated future revenues than on the company’s creditworthiness. Most advances generally get approved pretty quickly too. They’re options to consider for businesses that may not have an easy time getting approved for a traditional business loan from a bank or time to wait for a long approval process.

On the downside, fees may be higher than the interest rates on typical business loans. Also, paying off these advances early doesn’t generally help save the borrower any money, as with regular loans. That’s because they’re based upon set fees for borrowing money and not a periodic interest rate.

In general, businesses may find cheaper and more flexible kinds of funding sources. On the other hand, not all businesses can qualify for bank loans for a variety of reasons. Some of these may include having few assets for collateral or not having a chance to establish credit. In these cases, MCA and ACH factoring may offer the only options.

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