The Advantages of Factoring Over Other Types of Business Financing

advantages of factoringThere are a variety of financing options for companies that need capital. Angel investors, bank loans, venture capital, and credit cards are all available options. While each of these has their advantages, there are also many disadvantages associated with them.

Businesses must consider these before choosing one of the above options. Among the most notable disadvantages, includes the fact that it may be difficult for companies to qualify for a number of these types of loans.

In the case of credit cards, the astronomical interest rates can cause a business so much money that it becomes challenging for them to repay. One option that may not be used as often as it should, and which can be an especially advantageous small business financing option, is factoring.

What is Factoring?

Factoring is fast, doesn’t require that a business have a good credit score, is available even for new companies and poses less risk than many other financing options. Below, we will discuss the advantages of factoring a little more in-depth. Before we begin, it is essential to explain what factoring is briefly.

Factoring essentially involves a company selling their invoices or receivables to what is known as a Factor. A Factor purchases those invoices at a discounted rate, collects the invoices from the company’s clients, returns the balance and then receives a pre-determined fee. Factoring, or invoice factoring, is an excellent option for businesses that have not been operating very long, or that have poor credit.

These are not the only types of companies that can benefit from this type of financing, but they may be the ones most grateful for its availability. This is because it can be difficult for businesses which haven’t been around for long or that don’t have the best credit to qualify for a bank loan or angel investing.

A venture capitalist may also shy away from them if their profit margins are not high. As a result, these companies have few options when they are in need of cash.

These are the Advantages of Factoring:

  1. The process is fast

    A company will be able to collect money for their invoices within seven days, often in as little as 24 hours

  2. A business’s credit score is inconsequential

    It doesn’t matter if a company has a credit score of 400 as long as their client’s credit scores are high. If their clients have good credit, a company will be able to use factoring as a funding option.

  3. It is an available option for new companies

    Even if the company is just starting out, as long as they have clients that owe them money via invoices then they will be able to generate capital in this way.

  4. Less risk

    A company that uses factoring is leveraging previous work or products sales. They are not securing a loan with any type of property, equipment or their business, which means fewer risks. Sure, there will be fees if a factor is unable to collect in a timely manner. However, there is less risk to a company that chooses to use invoice factoring, then one that takes out a bank loan.

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