Why is Invoice Factoring Better Than A Small Business Loan
When a small business needs a loan, there are a number of different options available to them. Many of these options will depend on the age of the company, their credit history, what types of assets they possess and what industry they are in. Newer companies in high growth, high-profit industries, can go after venture capital. Established companies, with good credit, can try for a bank loan. Small businesses who have not been in business for very long, have average credit and few assets will likely find it very difficult to get money loaned to them, whether from a bank or from private investors. Even if you have an above credit score, have a record of success you still may not be able to get a small business loan.
One option that is available to them is invoice factoring, also referred to as accounts receivable factoring or invoice funding. This type of financing mostly requires that a company has customers who typically pay on time and have outstanding invoices. Below, we will take a look at why invoice factoring is better than a business loan and when a company might be best served using this type of financing.
- Doesn’t require taking on debt: Factoring does not require that a company take on additional debt. While it is often necessary for businesses to borrow money in order to get started and stay afloat, it is generally accepted that the less debt used, the better. Having debt makes it harder to get loans in the future and also puts a lot of pressure on companies to pay it back. Factoring allows companies to receive needed monies without the hassle and risk of using a loan.
- Money is received quickly: If a company needs money fast, there are few better options then invoice funding. In less than 7 days, a company can receive a large portion, up to 90% of their outstanding invoices. For companies with the already established relationship with a factor, this time can be shortened to around 48 hours. This makes it a perfect option when a company finds themselves needing a quick infusion of cash.
- Fewer hurdles: In order to receive a bank loan or a line of credit, it is necessary to provide a number of proofs that you are a good credit risk. A company will need to provide all of their financial statements, have very good credit and have been in business for a good amount of time, generally more than 3 years. In contrast, a company looking into invoice financing, will not have to provide this information. While a factor may want background information on the particular company they will be doing business with, the biggest concern will be the credit of the entity (individual or company) that owes on the invoice. This takes a lot of pressure off the company in need of money.
- Companies never have to pay back the money: Because the money given out is not a loan, it does not have to be paid back. As a result, there are no payments, principal, and interest, to be made. The factor is paid back after they collect the invoices.
- Factors handle collection duties: Not only will a factor give a company a lump sum of money up-front, they will also handle collection duties for those invoices. For businesses without a collection department, this provides a much needed and valuable service. Now obviously, this service is not free, the company will be required to pay the factor a pre-set fee after the invoices are collected.