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Factoring vs Bank Loans

In order to win customers and survive in a competitive business culture, you often have no choice but to provide your customers with goods and services on credit. While you wait 30, 60, or 90 days to receive the money owed to your company, you may have to bypass hiring staff, pursuing growth opportunities, or investing in new equipment. You could take out a bank loan, but stringent requirements mean that you may not qualify for it. Accounts receivable factoring offers an alternative, simpler solution for your cash flow problems.

Major Differences between Factoring Receivables and Bank Loans

When you apply for a business loan with a bank, the primary emphasis is on your company’s creditworthiness and value of its assets. The banker needs to know that you have the resources to repay the loan before he or she will consider approving it. This means you can expect to complete a long application form listing your business assets, their values, and your credit accounts with other lenders. After all of that, there is no guarantee of approval. When you choose factoring, your company’s assets and credit are irrelevant. That is because the company making the accounts receivable loan evaluates your customer’s ability to repay instead.

Unless you have perfect credit and have been in business for years, a business banker will require you to put up some form of collateral before approving your loan request. This means you must risk one or more valuable assets to gain access to the cash flow you need. With accounts receivable factoring, you are only selling an unpaid invoice that represents money already owed to your company. Should your customer fail to remit payment, the factoring company assumes the risk of collection.

Some small businesses prefer to keep an ongoing line of credit open with a factoring company. This enables the owner to borrow against another invoice immediately after the previous one has been paid.

Is Factoring a Smart Choice for Your Business?

When deciding if you want to apply for an accounts receivable loan, keep in mind that the factoring company takes a percentage of the invoice value as a fee for providing you with immediate cash. Factoring makes the most sense for your company when the fees for selling an unpaid invoice are less than what you can gain with the money, such as additional customers because you had the cash to invest in advertising.