Business Loans Versus Factoring: What You Should Know Before You Sign

With an evolving economy, business owners must be nimble both as decision-makers and financially.  As markets change, it’s common to find oneself in a situation where investments in equipment, personnel, material, or vendor services are required to adapt and maintain a competitive edge.  When the war chest is running thin, businesses typically have two options to fulfill their obligations: business loan or Accounts Receivable Financing, or, invoice factoring.  Let’s dig into each to better understand the difference.

Small Business Loan

Common Features:

  • Fixed (Initial) Borrowed Sum
  • Predetermined Payment Schedule
  • Interest Accrued Over Time
  • Lump borrowed funds are typically available in 3-7 days

The traditional funding option, small business loans, can be a helpful option for businesses in a short season of growth with a variety of growth-related expenses such as a facilities build-out, expanding inventory, professional services/system integrations, and acquiring multiple pieces of equipment.  This method of funding is an excellent way for a business with a good to excellent credit rating to fund a short-term expansion with known expenses.  Some businesses will use small business loans to fund payroll to bridge a gap during a particularly aggressive investment takes place, though there are other payroll funding options better suited.

Factoring and Invoice Financing

Common Features:

  • Cash flow when you need it/not fixed
  • Faster receipt of funds (same-day in many instances)
  • Receive funds you’ve already earned, not a loan
  • Optional back-office features may be included
  • Sustainable growth cash flow

While not typically used for asset or equipment acquisition, invoice factoring provides your business with consistent cash flow based on billable work, so you’re no longer waiting 30, 60, or even 90 days to receive funds for products or services rendered.  The obvious benefit being keeping your business moving forward with receiving new inventory, raw materials, and payroll to fulfill future orders.  The added benefit of an invoice factoring program is during sudden growth periods, your business will be able to self-fund a larger portion of expansion, from hiring new staff to updating equipment.  Large equipment purchases are still better served by an equipment loan, especially while rates remain low, keeping the much-needed capital in your business.

Thinking Invoice Factoring Might Be Just What You Need?

Our team of experienced factoring professionals can walk you through different options and scenarios, and help you select the right program for your business’ current or future needs.  Contact us today to take your next step!