What’s the difference between factoring and traditional bank loans? When searching for financing business owners typically turn to banks for a loan. In many cases, this option is ideal, but there are times when invoice factoring is preferable – for several reasons.
Traditional Bank Loans
With traditional bank loans, you provide the bank with the required documentation, and they decide whether to make the loan. This process involves plenty of paperwork and approval can take between several weeks to a few months. The bank’s approval depends largely on the business owner’s credit report. Also, most banks require at least tow years of positive financial statements.
Bank loans also come with restrictions that limit how the loan proceeds can be used. There are also restrictions that prevent borrowers from incurring additional debt or selling off business assets.
Invoice factoring allows the business owner to convert their accounts receivable into immediate cash to cover operating costs without taking on additional debt. The process is simply selling your invoices to the factoring company for a small discount. In return, the factoring company gives the business owner immediate cash and handles the collections of the invoices.
Unlike bank loans, factoring companies look for the creditworthiness of your customer, not the businessowners personal credit history. Invoice factoring doesn’t require lengthy applications, so approval times are very fast. In fact, funding of many applications occurs in as little as 24 hours.
Invoice factoring doesn’t require any upfront fees and there are no monthly minimums or maximums on the amount you factor. Furthermore, factoring doesn’t place any restrictions on how the proceeds are used.
As you can see, if you have a well-capitalized business with excellent cash flow and a spotless credit history, then a bank loan might be your best option. On the other hand, if you’re a startup or a fast growing company looking for a fast cash injection with no restrictions on how you use the cash, invoice factoring is the better option.
Not sure if invoice factoring is right for your particular situation? Give us a call at 1-800-297-6652 for a no-cost, no-obligation consultation and learn about our flexible factoring solutions. Or click here to get a quick quote.