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Invoice Factoring vs. Traditional Bank Loans

What’s the difference between invoice factoring and traditional bank loans?  It’s a question we hear a lot, so in this article we’ll take a look at the pros and cons to help you decide which is best for your company. 

When searching for financing to meet your day-to-day expenses traditional bank loans or lines of credit are often the first choice.  Banks are often the first choice because of their affordability.  There are many times when invoice factoring is preferable – for a number of reasons.

Traditional Bank Loans

With traditional bank loans, you provide the bank with the required documents and they decide how much, if anything, they will lend you.  The process usually involves plenty of paperwork and approval can take between several weeks to several months.  Approval will depend on credit worthiness, collateral, time in business and the banks general appetite for your type of business. Many startup companies and companies experiencing accelerated growth will have challenges getting qualified. 

Also, bank lines of credit come with restrictions called covenants.  These covenants limit how the loan proceeds can be used and limit how much money you the business owner can take out of the company.  These covenants can leave a company without enough money to grow. 

Invoice Factoring

Invoice factoring also referred to as receivable factoring allow you to convert your invoices into immediate cash to cover expenses without taking on debt or selling off equity.  The process is simple, you pick  the invoices you want to sell to the factoring company and receive 85%-95% immediately.  Once your customer pays the invoice the factoring company takes a nominal fee from the balance and refunds the balance to you. 

The factoring company bases their underwriting on the credit strength of your customers.  So, business owners with rough personal credit or start-ups can both quickly qualify for invoice factoring if they have strong customers.  Factoring companies can move quickly, often getting a prospect funded in less than a week. Invoice factoring doesn’t require any upfront fees or points.  Furthermore, factors don’t place any restrictions on how the proceeds are used. 

American Receivable has funded start-ups and growing companies for 42 years.  Still operated and managed by the founders, Jack Stieber and Brad Gurney understand the challenges faced by entrepreneurs.  To learn more call us today at 1-800-297-6652 or complete our quick application form.

Voted best Invoice Factoring Company for SMBs for 2023 by Business.com


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