“Beyond the threshold, the hero journeys through a world of unfamiliar yet strangely intimate forces, some of which severely threaten him, some of which give magical aid.” — Joseph Campbell, The Hero with a Thousand Faces
Merchant cash advances have spent the past decade earning a reputation for predatory terms, sky-high effective rates, and a trail of ruined businesses, all while borrowing the good name of the factoring industry to do it. Lately they have started drawing real scrutiny, from regulators, from lawmakers, and from the occasional viral television segment.
The problem is that too many of the people sounding the alarm cannot tell an MCA from a factor. Some of the loudest voices have gotten the story flat wrong, dragging a centuries-old, asset-based financing practice into the same net as the very product piggybacking on its reputation.
The stakes here are real. The confusion shapes the disclosures business owners receive, the laws that govern how they raise capital, and the judgment of anyone trying to tell a genuine financial ally from a predator wearing its clothes. Knowing how to tell them apart starts with understanding how each one actually works.
The Foe in Disguise
The confusion starts to make sense once you see how an MCA is built. It hands a business an upfront sum of cash, then collects repayment by skimming a percentage of that company’s future sales, plus a fee. The structure is notorious for high default rates, and behind nearly every true default sits a dead business and an owner who never fully understood what they signed.
The deeper problem is the language. MCAs market themselves around “future receivables,” a term invented to sound like the real, completed receivables that factors actually purchase. They advertise a “factor rate” engineered to echo factoring while meaning something entirely different. The resemblance is deliberate, and the confusion is the whole strategy.
Factoring is far older and far simpler than the product impersonating it. It ranks among the oldest financial practices in human history, written into the Code of Hammurabi and used across Mesopotamia long before banks existed. It later funded the American colonies, giving merchants the capital to bring in the goods that built the country, and it has powered transportation, construction, and manufacturing ever since.
The Ally You’ve Never Heard Of
Factoring’s mechanics are refreshingly simple. When a business completes work, delivers a good or a service, and issues an invoice, it can sell that verified invoice to a factor for immediate cash instead of waiting 30, 60, or 90 days to get paid. The factor then collects from the account debtor, the business’s customer, once the invoice comes due.
Because the invoice is a real asset the business already earned, the arrangement creates no debt and settles itself the moment the customer pays, handing over liquidity without adding a liability to the balance sheet. Factors also absorb the work most small businesses cannot afford to do themselves, handling credit investigations, verification, remittance posting, quality monitoring, and collections for a small fee. In effect, they run an entire back office so the business can focus on earning the next invoice. For a practice this old and this useful, factoring remains the best-kept secret in small business finance.
Set a factor and an MCA against the same $100,000 invoice and the difference is impossible to miss. Say the factor charges a 2% fee: that $2,000 pays for the back-office work the factor absorbs, drawn against an asset the business already earned and settled when the customer pays. Say the MCA quotes a “factor rate” of 1.2: that requires the business to repay $120,000, a $20,000 cost pulled from daily sales whether the money is there or not, with no services behind it and nothing to show for it beyond the advance. The borrowed language makes the two look like cousins, even as the structure makes them strangers.
Unmasked on the Record
In April 2026, a federal bankruptcy court in the Northern District of Texas pulled the mask all the way off. Hearing a case brought by Denali Construction Services, the court examined a series of MCA agreements and ruled that they were not advances against future sales at all, but loans, and usurious ones.
The documented numbers are staggering. The agreements carried effective interest rates of 427.9%, 348.3%, and 229.2% per annum against a Texas cap set at a tiny fraction of those sums. The court voided them as constructively fraudulent, applied the state’s usury statute, and awarded the debtor treble damages running into the millions.
What gives the ruling weight beyond this one case is the method behind it. The court set aside what the contracts called themselves and examined only how they actually functioned. Once the invented terms and borrowed language were stripped away, the line landed in exactly the place the factoring industry has been pointing to all along.
A Fight Worth Having
The same disguise has done real damage in statehouses, where legislators trying to rein in predatory lending keep accidentally sweeping factors into the net. California’s SB 1235 was the first to conflate the two, requiring factors to issue disclosures built for loans. Because the rules treat a factor’s reserve as a fee, the resulting math produces an interest rate that looks astronomical and means nothing. A meaningful share of AFA members have decided to stop doing business in the state rather than risk liability for an honest error.
Vermont nearly repeated the mistake when a last-minute amendment to HB 648, passed with almost no discussion, imposed loan-style disclosure and licensing requirements on factors. By the AFA’s account, the amendment was driven partly by public criticism of structured settlement purchasers, who were wrongly labeled “factoring companies” in the coverage, pulling an unrelated practice into the law.
Texas shows the better path. With HB 700, the American Factoring Association helped pass a law that puts MCAs on a level playing field with every other creditor in secured lending. Any MCA that wants to debit a business’s account for payments on “future receivables” now has to hold a lien on those receivables, file it, and respect the collateral of others, the same rules factors and banks have always followed. The state now offers the most favorable factoring environment in the country. The work continues at the federal level, where the AFA and SFNet’s advocacy committee carry the fight, and the CASH Act would set a national disclosure standard built for how factoring actually functions, ideally by taking the Texas model nationwide.
None of this advocacy runs on its own. The AFA depends on the support of the factoring community to keep educating lawmakers and defending small business access to capital, and anyone who wants to join the fight can become a member or donate at americanfactoring.org.
The Ally on Your Side
This is the journey Dare has chosen to take alongside the businesses it serves. Our purpose is to give, which is why we built NN6 and our own platform to support the factors who support small business. The work forms the backbone of the American economy, a bipartisan cause that has nothing to do with which way anyone votes.
Factoring sits inside the banking system, funded by the same banks that recognize it as the legitimate, asset-based service it has always been. It supports payrolls, jobs, and taxes across the physical economy, and it deserves to be known by its real name, not confused with faceless lenders operating behind websites with no CEO to call and no asset behind the cash.
Every hero’s journey turns on the same test: learning to read the cast of characters correctly, because the threats and the helpers travel the same road, speak in similar tones, and arrive at the same moment of need. The factoring industry has been the helper since the beginning of commerce, and knowing that, along with knowing who stands on the other side, is how the story ends well.
Want an ally who has walked this road for centuries?
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Until next time,