Invoice Finance & Merchant Cash Advance

What it is

Two different products that address the same problem, which is waiting to be paid.

Invoice finance advances a proportion of an invoice as soon as you raise it, rather than when the customer settles. When they do pay, you receive the balance less the funder's charge.

A merchant cash advance works from card takings instead of invoices. The funder advances a sum and takes an agreed percentage of your daily card receipts until it's repaid. That suits retail and hospitality, where there are no invoices but there's steady card income.

What people use it for

A recruitment agency paying contractors weekly against invoices that settle in sixty days. A haulier whose fuel and drivers are paid this month for work that will be paid for next quarter. A manufacturer whose largest customer has extended payment terms and expects them to absorb it.

The pattern is a business that's profitable on paper and short of cash in practice. The work has been done, the invoice has been raised, and the money is real. It's simply not here yet.

Merchant cash advance shows up differently. A restaurant refitting a kitchen. A shop buying stock ahead of a busy season. Businesses with strong card takings and no invoice book to borrow against.

What can be funded

The two products draw on different things.

• Unpaid invoices to other businesses, raised for work already completed
• A whole sales ledger, or selected invoices only
• Export invoices, with some funders
• Card takings, in the case of a merchant cash advance
• Recurring or contracted income, in some structures

What doesn't work is invoicing consumers rather than businesses, invoices raised before the work is done, and one-off invoices to a customer with no trading history. Funders are lending against the likelihood of payment, so the strength of your customer matters as much as your own.

How it works

Invoice finance comes in two main shapes.

With factoring, the funder takes on collections. They advance a proportion when you raise the invoice, then chase the customer for payment themselves. Your customer knows the funder is involved. It removes the credit control burden, which some businesses value and others would rather avoid.

With discounting, you keep collections and the customer generally doesn't know. You chase payment as normal and repay the funder when it arrives. It's more discreet, and it usually requires stronger financial controls, because the funder is relying on you to manage the ledger.

Either way, the funder advances a proportion of the invoice up front and releases the balance, less their charge, once the customer settles.

A merchant cash advance is simpler in structure. A fixed sum is advanced and repaid as an agreed percentage of daily card takings. Repayment flexes with trade, so quiet weeks cost less and busy weeks clear it faster.

It costs more than a straightforward facility

You're paying for speed and for the funder carrying the wait. Set against an ordinary facility of the same size, invoice finance is generally more expensive. It's worth comparing rather than assuming it's the obvious answer because it's quick.

It isn't free money

Advancing an invoice brings cash forward. It doesn't create it. When the customer eventually pays, that money is already spoken for, which means the following month can feel tighter than expected until the cycle settles down.

A merchant cash advance repays fastest when you least notice

Taking a percentage of daily takings feels painless, and that's precisely the risk. A strong month clears the balance quickly and quietly. Look at the total cost of the advance rather than the daily deduction, because the deduction is designed not to hurt.

Will my customers know?

With factoring, yes, because the funder handles collections. With invoice discounting, generally not, because you carry on chasing payment yourself. If customer perception matters to you, say so at the start, because it decides which route is worth looking at.

Do I have to finance my whole sales ledger?

Not always. Some funders want the full ledger, others allow you to select individual invoices or particular customers. Selective arrangements give you more control and often cost more per invoice. It depends what you're trying to solve.

What happens if my customer doesn't pay?

That depends on whether the facility is with recourse or without. With recourse, the debt comes back to you. Without recourse, the funder carries more of the risk and charges accordingly. This is one of the most important things to check and it's easy to skim past.

Is a merchant cash advance the same as a loan?

No. There's no fixed monthly payment and no fixed end date. You repay a percentage of card takings until the agreed amount is cleared, so it moves with trade. That flexibility is the appeal, and it also makes the total cost harder to compare against a loan.

Can a new business use invoice finance?

It's more accessible than most funding for a young business, because the funder is looking at your customers as much as at you. A short trading history matters less if you're invoicing established companies. Worth asking earlier than you might for other products.