As business owners search for additional working capital for their company, they often ask what is best for their company, factoring their invoices or taking on a traditional bank loan. Both financing solutions have their place, and many businesses will actually use both forms of financing during their life span. Here is a short guide to help you understand them more.
Traditional Bank Loans
Traditional bank loans require significant financial documentation, both corporate and personal. Before a bank makes a loan, they will have to see in your historical financials the ability to pay the loan back. Getting approved for a bank loan usually takes several weeks and longer once you have submitted all requested documents. Banks will also focus on the owner’s personal credit score. For these reasons, companies less than five years old often have little success obtaining bank financing.
Traditional bank loans will come with covenants. These covenants will dictate what the loan can be used for, how much money the owner can take out of their company and other restrictions. The bank puts these in place to help protect against the business defaulting on its loan. Once a bank loan is made the bank will not increase the loan amount for at least a year, regardless of the opportunities that are presenting to the business.
Factoring companies buy your invoices for cash. Giving you the money, you need to make payroll and cover operating expenses. Selling your invoices to a factoring company does not create a debt that you have to pay back.
The application process is less burdensome. The factoring company focuses on your customers credit strength, not your personal credit score or companies’ financial strength. Factoring companies are set up to move quickly, often funding a new account in less than a week. Invoice factoring doesn’t require any upfront fees and there are no monthly minimums or maximums on the amount you factor. The factoring line will grow as your company grows. The money from factoring company is not attached to any covenants restricting how you spend your money.
Companies that are well-capitalized, positive flow and a strong credit score might find a bank loan to be their best option. If your company is a start-up or looking to finance a quickly growing company invoice factoring could be your best option.
American Receivable offers Top Rated Factoring at industry best prices. Call us today to learn how our flexible factoring program can benefit you.