Factoring vs. Bank Loans: Which is Better for Your Company

Whether it’s a new business opportunity or trying to get through a tough spot, the question asked by business owners is often, “Is invoice factoring better than bank loans?” The answer to this question depends on your business’ circumstances. If you are looking for a short-term solution, then invoice factoring may be the best option for your company. For example, invoice factoring can provide you with same-day working capital with decent business credit. On the other hand, bank loans typically take up to two weeks before they are approved and funds are available.

What’s more: There are many benefits associated with invoice factoring that make it an excellent choice over a loan from the bank or credit union. Let’s explore the added benefits of invoice factoring over bank loans.

Comparing requirements of factoring over traditional bank loans

Bank loans have significant application and underwriting requirements to qualify while invoice factoring is available by completing a much smaller, less invasive application. Most invoice factoring companies are willing to work with you even if your business has had credit issues in the past, but might affect your discount rate.

Bank loans typically have a high interest rate while invoice factoring allows businesses to get better rates on their invoices which can result in thousands of dollars saved each month. The catch is, you need to have invoices to factor. This is not an ideal method of raising working capital for a brand new business, however an established business with 30, 60, or 90-day terms on invoices can benefit from securing capital quickly to fund activities like payroll, inventory, and other operating expenses during a surge of activity.

How the funds are dispersed

In a traditional loan, you typically receive all funds at once, and make regular installment payments to repay the loan. With invoice factoring, you are able to receive funds slightly discounted when you send in the invoice (electronically), which means it functions much like a revolving line of credit. This can be extremely beneficial for businesses with seasonal swings in cash flow or need working capital assistance during times when business activity increases.

Consider this scenario: You invoice your clients bi-weekly and they pay 30 days after invoice. That means you invoice your clients on the first of each month and they pay 30 days later. If you receive an invoice from a new client that needs immediate attention but do not have access to working capital during this time frame, invoice factoring will provide quick access to cash so these types of exceptional events don’t become problematic for your business.

If your business needs working capital to fund growth or take on larger projects, consider speaking with one of our factoring experts at ENGS Commercial Capital, and let us put together the perfect working capital solution to help your business grow.