Restaurant funding that should be avoided:
Merchant Cash Advance, Revenue-Based Financing or Accounts Receivable Factoring

During the slow months, restaurants will commonly get merchant cash advance (MCA),[i]  revenue-based financing[ii] or accounts receivable factoring.[iii] I would advise against these types of funding options for restaurants. I put together this guide, so you are equipped to make an informed decision. Throughout the guide, “factoring agreements” will encompass MCA, revenue-based financing or accounts receivable financing.

If you think these factoring agreements are the perfect option for financing your restaurant, you are wrong.

You should be extremely cautious if anyone is telling you that these factoring agreements can be a fast and effective way to solve your cash flow issues and grow your business. Before you jump into one of these types of factoring agreements, be sure that you understand the terms and the high cost of the funds. Any financing solution should improve your financial situation and provide long-term business success.

Restaurant financing can include restaurant loans and merchant cash advance. While both a restaurant loan and cash advances are ways for restaurants and small businesses to obtain financing for capital needs, they are both fundamentally different types of financing.

Restaurant Loan

With a loan, a business is borrowing money from the lender with an intent to pay it back plus interest.[iv]

Merchant Cash Advance, Factoring Agreements, Revenue-Based Financing or Accounts Receivable Financing

Factoring agreements, like cash advance, are not a loan at all.[v] A cash advance is the sale of future receivables at a discount, so no actual lending occurs.[vi]  Factoring, also known as factoring receivables, is a type of funding method in which a business owner uses unpaid customer invoices as collateral under the agreement that he or she will pay back the money.[vii]

Why do restaurants get cash advance?

  • Working capital
  • Purchase property
  • Purchase equipment
  • Hire & pay employees
  • Pay taxes
  • Expansion & remodeling
  • Emergency reasons[viii]

Again, factoring agreements are not bank loans.[ix]  Historically, restaurants will turn to factoring agreements for two reasons: (1) they cannot get approved for a bank loan or (2) due to the current credit crunch, bank loans can often be difficult to get, but factoring agreements are still easy and available.

Reasons to be wary of factoring agreements, specifically MCAs:[x]

  • Your APR could be in the triple digits.
  • Higher sales mean a higher APR.
  • There’s no benefit to repaying early.
  • There’s no federal oversight.
  • Your credit score may be pulled.
  • There’s a debt-cycle danger.
  • Contracts can be confusing.[xi]

The Math Behind Factoring Agreements

If a restaurant gets one of the factoring agreements, the financial effect of that would be as follows:[xii]

The Bottom Line

If you think factoring agreements, like MCA, revenue-based financing or accounts receivable factoring, is the perfect option for financing your restaurant, you are wrong.

Companies offering Merchant Cash Advance:


[i] Gerri Detweiler, Merchant Cash Advance, Nav (Oct. 21, 2020), https://www.nav.com/business-financing-options/merchant-cash-advance/ (last visited Jan. 20, 2022); Merchant Cash Advance, Wikipedia (last updated Jan. 14, 2022), https://en.wikipedia.org/wiki/Merchant_cash_advance (last visited Jan. 20, 2022).

[ii] Kristina Michelsen, Esq., Revenue-Based Financing, University of Vermont (considering revenue-based financing for small businesses, specifically community supported farms).

[iii] Factoring of Receivables, Internal Revenue Service (June 2006), https://www.irs.gov/pub/irs-utl/factoring_of_receivables_atg_final.pdf (last visited Jan. 20, 2022).

[iv] Ben Luthi, How do Business Loans Work?, Nav (Nov. 5, 2021), https://www.nav.com/blog/how-do-business-loans-work-128545/ (last visited Jan. 20, 2022).

[v] Id.

[vi] What is a Merchant Cash Advance?, Funder Intel (2019), https://www.funderintel.com/what-is-a-merchant-cash-advance (last visited Jan. 20, 2022).

[vii] Intrepid Private Capital Group, What is a Factoring Loan?, Intrepid Executive Group (Apr. 6, 2018), https://www.intrepidexecutivegroup.com/blog/what-is-a-factoring-loan/ (last visited Jan. 20, 2022).

[viii] Cash Advantages for Restaurants, Gud Capital (2018), https://gudcapital.com/restaurant-cash-advance-merchant-financing-for-dining-establishments/ (last visited Jan. 20, 2022).

[ix] Intrepid Private Capital Group, supra note v.

[x] In a recent case, the Federal Trade Commission recognized that merchant cash advance and debt collection industries “prey on small businesses” by engaging in “aggressive, and potentially misleading, marketing practices and uses potentially abusive collection tactics.” Settlement Order Permanently Bans Defendants from Merchant Cash Advance and Debt Collection, Federal Trade Commission (Jan. 5, 2022), https://www.ftc.gov/news-events/press-releases/2022/01/merchant-cash-advance-providers-banned-industry-ordered-redress (last visited Jan. 20, 2022). MCAs are not only a recognized arena to prey on small business, but it also provides no benefit to your business.

[xi] Steve Nicastro, Is a Merchant Cash Advance Right for your Business?, NerdWallet (Jan. 7, 2021), https://www.nerdwallet.com/article/small-business/merchant-cash-advance (last visited Jan. 20, 2022).

[xii] Another example with more detail can be found at Meredith Wood, Factoring Receivables: Everything You Need to Know, Fundera by NerdWallet (Dec. 20, 2021), https://www.fundera.com/business-loans/guides/factoring-receivables (last visited Jan. 20, 2022).



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