One of the primary reasons businesses choose invoice factoring or accounts receivable financing is because it's an efficient way to ensure cash flow. There is a variety of advantages a company may enjoy with receivables factoring rather than a traditional bank loan. It's a valuable exercise to consider the differences between each option to ensure the business chooses the best funding for its needs.
Factoring Receivables: No Debt!
One of the biggest differences between what factoring companies do and how a bank loan works is that a business can get funds from a factoring company without going into debt. A regular bank loan is a debt that has a principal and interest, as well as a repayment timeline.
Further, the money from factoring financing can change over time as a company's receivables increase. A bank loan has a limit and doesn't change unless a business takes out a second loan. A business can form a valuable relationship with a factoring company that changes over time.
As a business grows and uses a factoring service, it's usually standard practice to renegotiate or adjust interest rates over time. A business that uses a factoring service for a high volume of invoices may qualify for extremely competitive rates.
Bank Loan Applications
One of the reasons some businesses turn to invoice factoring is the application process. It's possible to work with factoring services as a company with bad credit, whereas applying for a bank loan with bad credit is usually a futile experience. A business must present solid financials, good assets, and low liability to qualify for a bank loan, and new businesses find these requirements difficult.
Factoring lending depends on the creditworthiness of the customers sent invoices by the factoring company. A bank loan depends on the credit history of the company applying for financing. After the Great Recession, many businesses found it impossible to qualify for bank loans, so factoring services increased in popularity.
Invoice Factoring: Quick and Easy
There isn't a line in the sand where applying for a bank loan or arranging to work with accounts receivable financing is better or worse. Even though a business must wait to qualify for a bank loan and wait even longer for the funds, a bank loan is a solid option for building credit as a new business.
When time is short, factoring companies become an incredible resource. It only takes a few days to complete the account setup process and receive funds. For a company that needs a quick infusion of cash, working with accounts receivable factoring companies is the best source of funds.
In addition to quick funds, the amount of paperwork involved with factoring services is much less than a traditional bank loan. The reason a bank requires more paperwork is because it tends to carry a higher risk for a loan.
Accounts Receivable Financing: Extra Services
It's a good idea to consider the added services available through companies that provide accounts receivable financing. Not only will factoring companies provide back office services like the collections of your accounts receivable, but some companies also provide data on customers that can help with future marketing and sales initiatives.
Research Your Financing Options
Deciding whether to use factoring services or a traditional bank loan does take some research, as well as consideration of many factors. For example, a business may need to weigh the value of building good credit with a traditional bank loan against the quick funds available through factoring.
FactoringClub.com is the premier source of information for invoice factoring companies. With factoring companies in most major cities and states, FactoringClub helps you find the right factoring company. Search our listings or call our factoring experts at (866) 748-7111 for assistance.