Factoring Vs. Banking

Factoring Versus Banking When a company is looking at available options for financing their business, they will find that there is a world of difference between working with a bank and a factoring company.

Banks require much more proof that your company is an acceptable lending risk. It may be necessary to have asset collateral and to be profitable for a minimal number of years before they are willing to part with their money. Being in a position to receive these types of loan can be extremely difficult for a new business and for those that may be struggling and need an immediate infusion of cash to keep them afloat.

Factoring is a much simpler and faster way for a company to get cash. In fact, they may able to receive money in a matter of days. A company does not have to prove their financial worthiness as they would when attempting to receive a bank loan. A factoring company is much more concerned about the credit of the company’s customers. Below, we will take a closer look at the differences between factoring and banking. Let’s discuss bank loans first.

Bank Loans

Banks will require that a company provide them with detailed financial reports. They will want an accurate count of a company’s assets and expenses. They will likely also require that a business be profitable for a number of years before they are willing to give them a loan. Now, for some businesses, this is no problem. Established companies that are strong financially and that have a good number of assets that can use as collateral may be able to get a bank loan with little problem.

In general, in order to have a good chance of qualifying for a bank loan, a company must have been in business for at least 3-5 years. Their assets must at least be worth the amount of the loan they are looking to receive and they will need to have an unblemished credit history.

As you can probably surmise, there are many businesses that would not qualify under these strict qualifications. They might just be starting out, don’t have that strong of a balance sheet and may have little in the way of assets. For these businesses, it is almost impossible to get a bank loan. Therefore, they have to research alternative funding resources. One very good option might be factoring. Factoring is a much easier way for a business to get the money that they need. We’ll talk more about what factoring is, how it works and how it differs from banking below.

Factoring

One of the biggest advantages of factoring is that it does not require a company to take out a loan. This contrasts sharply with doing business with a bank. If a company accepts money from a bank they will be doing so in the form of a loan. This means that they will have to pay it back and with interest. Having a lot of debt can put increased pressure on a business and make it more difficult to get additional loans in the future.

Factoring involves one business (a factor) buying the accounts receivables of another. The accounts are sold at a discount and the factor will do the collecting, return the reserve to the seller and then charge the seller a fee. This gives companies who need money the opportunity to get it really quickly. They don’t have to convince a bank to loan them money. Instead, a factoring company is happy to hand over the money because they have an opportunity to make money themselves.

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