Which is Better – A Loan or Invoice Factoring?

A business owner that is trying to improve their cashflow might consider applying for a bank loan. But there are other options too. For example, some companies might choose to factor their invoices instead. But what does this mean, and is it better than a bank loan?

The process of debt factoring is akin to ‘selling’ the invoices. The business looking to generate cash quickly can submit their invoices to a third-party company who will often pay them on the same day. This removes the need to wait until the invoice is due, which in most cases will be after 30 or 60 days (in some cases, 90 days).

The ease with which a business can access cash is usually the main reason people opt for factoring. Utah factoring company Thales Financial say that invoice factoring is a quick and easy alterative finance option for businesses. But how does it compare to the traditional bank loan?

The Difference Between Invoice Factoring and Bank Loans

While bank loans were once the main way for a business to generate capital, options such as debt factoring are now coming to the fore. And for good reason.

When applying for a bank loan, a business will often have many hoops to jump through. The process can be difficult and involves several credit checks. The business owner might have to personally guarantee the loan and will have to submit a plethora of documents to get approved. With debt factoring, the process is quick and simple. In most instances, approval for debt factoring can take less than 24-hours, compared to days or even weeks when applying for a bank loan.

A business can avail of factoring even with a poor credit history. This is because the factoring company will be checking the credit of the business’s customers rather than the business itself.

With a bank loan, payments tend to be fixed every month but the potential for borrowing more can be severely limited until the initial loan is repaid. With invoice factoring, there is a much more flexible borrowing structure. As the business grows, so too does the capacity to access more funds, which is what many business owners like.

Which is Better for You?

Some business owners are more traditional and simply like the idea of a bank loan. They like the fact that their payments will be set, and they can budget accordingly. However, other business owners like the flexibility that comes with invoice factoring. They know that if they are clever, they can negotiate favorable rates with the factoring company and offset these against savings made by paying their own invoices early.

Whether you go for invoice factoring or a bank loan will depend on your business’s circumstances and your personal preferences. If your business has a poor credit history or does not have enough of a credit history, you might find it hard to get approved for a bank loan. But with debt factoring, you do not have to worry about your own credit history as the factoring company will look at the creditworthiness of your customers instead.

Invoice factoring is also a great option for those businesses with customers that tend to pay on time as this helps to access cash quickly but also keeps the cost of factoring down. The quicker an invoice is paid, the less a business pays for the service of factoring.

To conclude, a bank loan and invoice factoring are both options for improving cashflow. But they are completely different from each other. A bank loan is a debt, while factoring is not. Also, invoice factoring tends to give you greater flexibility and quicker access to cash than a bank loan.