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Unsecured Loans vs Invoice Factoring – Which is Better for Your Business?

At one time or another, almost every business will find themselves in need of a quick infusion of short-term working capital. Trying to obtain a traditional bank can be a lengthy process and can often result in denial. Even if you can be approved, you may not be able to wait out the process or it may not be the best option for your business. Everything from a business emergency to an unforeseen golden opportunity can have a business owner looking for an immediate source of funding. There are a variety of alternative finance options available. Two common options are unsecured loans and invoice factoring. If you’re trying to decide between these two options, it’s important to understand how they differ.

 Invoice factoring

Unsecured Loans

Much like the name implies, an unsecured loan does not require any collateral. This type of funding approved solely on the creditworthiness of the business which means they must have a relatively high credit score. Unsecured loans are riskier for lenders and often come with a high-interest rate. The business must provide detailed documentation that their incoming revenue will be sufficient to cover the monthly payments for the life of the loan. The loan duration is typically shorter than a collateral-based or secured loan. 

Invoice Factoring

The biggest difference between an unsecured loan and invoice factoring is that factoring is not a loan. With invoice factoring, current, unpaid invoices are sold to a factoring provider at a discounted rate – typically 70-90 percent of the face value. The payment of those invoices is then made directly to the factoring provider. Once the payment has been received, the remaining balance is sent to the business minus a small fee. This provides the business with the cash they need quickly and efficiently without taking on additional debt.

How Do You Decide Which Option is Best?

Here are some things to consider when trying to determine which would be the best type of funding for your business.

Are you a B2B or B2C business? – Who your customers are is one of the most important factors when deciding between an unsecured loan and invoice factoring. A business that invoices other businesses may be eligible to receive either type of funding. Businesses that invoice customers or collect payment at the point of sale are not eligible for invoice factoring.

Length of Time in Business – Either funding option is going to be difficult for a start-up business to obtain, although invoice factoring may be the better possibility. While factoring companies do consider how long you’ve been in business, that is not the sole deciding factor. They also take other things into consideration, such as the creditworthiness of your customers whose invoice you want to sell to the factoring company. Providers of unsecured loans typically require up to six months of bank statements documenting regular deposits.

Recent Financial Difficulty – Unsecured loans and invoice factoring are funding options for businesses experiencing a working capital shortfall. While both options are meant to help businesses that are having difficulty obtaining a traditional loan, each does have its own requirements for approval. For an unsecured loan, a business needs to carry a positive balance in its bank account and have no more than two negative daily balances in a single month. 

As previously mentioned, invoice factoring companies base their determinations on the creditworthiness of those customers who owe payment of invoices to the business. Provided the business submitting invoices for factoring hasn’t experienced extreme financial difficulty and works with reliable customers, a negative balance or two in its bank account will not prevent approval.

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Working Capital Without Debt

Although not every business can qualify for invoice factoring, it can be a great way for B2B businesses to maintain consistent cash flow without taking on additional debt. While we specialize in invoice factoring, Capflow Funding Group will work with you to find the best funding solution to provide your business with immediate working capital. We service many different industries with a variety of different funding needs. Contact us today and find out how invoice factoring can help grow your small business.


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Meet CapFlow at NACLB 2023!
Meet CapFlow at NACLB 2023!