Two types of business financing: invoice factoring and bank loans
Businesses typically have urgent and unexpected needs that would require additional financing. When the need arises, it’s usual for companies to turn to traditional banks for the funding that they need. However, with the advent of alternative financing, more options are now available to businesses. One of the more popular alternative financings is invoice factoring.
To those not yet familiar, you might be thinking: “What is invoice factoring?” Invoice factoring is the process of “selling” a business’ invoice to a factoring company, which will then pay the amount of the invoice to the business less a small portion as a fee. Now, invoice factoring and bank loans are both used by businesses as a means to the same end: funding. Businesses need funds to keep their cash flow smooth and to keep abreast of all their dues and payments. In this article, we will get to know each of their advantages and understand what sets one apart from the other.
What are the benefits of invoice factoring?
When it comes to accessibility, invoice factoring brings much to the table for businesses, especially for small and start-up businesses. It has a comparably quicker turn-around time from application to approval. After the factoring company confirms that your customers are creditworthy, the release of the funds would come next. Moreover, unlike traditional bank loans, you will not have to deal with high-interest rates or monthly payments. The factoring company releases the amount to you in bulk and then withholds a certain portion as their fee. This way, the factoring company becomes the new creditor of your customers as they will be the ones who will collect the outstanding amount from them.
What are the benefits of bank loans?
Stability is the strength of traditional banks. Thus, while there are many alternative financing options these days, many businesses still rely on bank loans for their financing. Businesses that are looking for steady income streams in the future can take advantage of the installment schemes that banks have to offer. Moreover, the amount that you can loan can depend on your business assets and other factors. In the event your business encounters any unforeseen circumstance that would prevent it from paying the loan in the schedule agreed upon, you can have your account restructured in such a way that would be beneficial for you and the bank. This way, you will not have a bad record with them.
The difference between a traditional bank loan and invoice factoring
After we have explained the benefits of both financing options, we now look into the differences.
In invoice factoring, the application is easier. So long as you have outstanding invoices with customers that have good credit standing, factoring companies should not hesitate to do business with you. On the other hand, banks do not fund businesses as easily. Often, banks favor established businesses with good credit records over businesses that just started. Also, having assets that can be used as collateral could be a tremendous help in nudging the bank to approve the loan.
The application process
Invoice factoring is a streamlined process. Businesses would need to fill out the form and provide all the needed information, as well as attach the list of their customers for the background check. Banks, on the other hand, have a set of requirements that you need to comply with, such as bank statements, a list of creditors and customers, etc., after which a background check will be conducted to verify the business’ creditworthiness – all before the loan will be released.
Improving business cash flow
Both fundings would inject much-needed funds into the business. However, with invoice factoring, you will not have to pay any interest and thus there are no additional costs to the business. Moreover, since the approval is quicker, it would be a major help in case the business need is immediate. We can now see why invoice factoring is used to improve cash flow by many small and starting businesses. On the other hand, funding from a bank would mean the business would now incur debt. Nevertheless, if the business has a sure stream of income in the future, then taking in the loan would not disturb the business’ cash flow.
Invoice factoring with CapFlow Funding
CapFlow Funding can provide you with the invoice factoring service that you need. Not sure about invoice factoring and would like to explore other options? CapFlow offers other options as well. Reach out to us and let us have a conversation about what is best for your business.