Factoring vs. Business Loan
How does factoring compare to a business loan when you need working capital? Lets take a look at these options.
Once upon a time, a bank was the first thought that small business owners had when seeking money, and truthfully a business loan can be a perfectly fine solution for a cash crunch. You put up some type of collateral asset and after the loan is processed you then get a lump sum that would be usable to fill in the gap in your cash flow. And if you need more capital you simply renegotiate with the bank, often pledging more collateral.
This is great if you can get a loan. There are literally thousands of commercial banks in the United States, according to the FDIC, that are supposedly in the business of making loans. One would think it would be rather easy to get a loan. The reality however is that getting a loan can be problematic and many business owners simply will not qualify.
Factoring is often an easier way for small businesses to get money because a factor (a company that buys receivables and invoices) is more concerned with the credit worthiness of end customers rather than the credit worthiness of the business that it is factoring for. It’s not unheard of for businesses that have filed bankruptcy to still qualify for factoring. Usually funds are available faster through a factor, banks loans can take days to be approved, while most factors will get your money to you within 24 hours of purchasing invoices.
Factoring is growing in popularity and can be a really useful business tool. It’s a way to boost your cash flow when no other way may be available, it’s easy to measure your return on investment, and it eliminates a lot of paperwork and headaches involved with invoices and collecting payments. Perhaps best of all you don’t have loan payments hanging over your business.
Factoring can be a very flexible way to get working capital as your business grows. However, factoring isn’t free, with factors buying your receivables and invoices at a discount, usually in the 10% range though it can vary from factor to factor and discounting up to 35% isn’t unheard of. Like everything else in the world of business, do your homework, know who you are dealing with and be sure you understand all terms.