When looking at the various funding options, you may review invoice factoring vs. bank loans. Here is a quick and handy comparison.
If your business needs working capital, you will likely research both invoice factoring and bank loans as possible funding options.
But how do you know which one is the better option?
Every business scenario is unique. And while there may be multiple factors that may impact your decision, there are two important elements to consider — how quickly you need the funds and the borrowing costs associated with your choice.
Invoice factoring and bank loans have little in common, other than both providing cash to businesses. We’ve put together a simple breakdown of the two borrowing options to help you decide which one works best for your business:
First, what is invoice factoring?
Invoice factoring is a funding method that gives your business access to immediate cash by selling your invoices to a third party at a slight discount — with considerable advantages. (More on that in a bit.)
Let’s say you’re expecting a customer to pay a £10,000 invoice next month. If you need that money today, you can sell that invoice to a factoring partner and receive slightly less than the totalling amount on the bill — right away.
So invoice factoring isn’t the same as borrowing money. Instead, you’re selling an asset (your accounts receivables). You don’t owe the lender any money so there’s no debt added to your business.
When bank loans make sense
When you borrow money from a bank, it’s usually in the form of a traditional loan or line of credit. With this type of borrowing, you pay the principal plus interest until the loan is repaid in full. It’s the same as a personal loan, and is relatively straightforward.
While these conventional loans are pretty cut and dry, they add more debt to your business. For that reason, they can cost more in the long run — and you may not be able to close the cash flow gap when you really need it. Approval may also take long, and you’ll also be adding another liability to your business.
Here’s a quick breakdown of invoice factoring vs. bank loans:
What’s the best financing option for your business?
It’s clear there are many advantages with invoice factoring.
With factoring, you’re selling a valuable asset to gain more funding, not incurring any debt. You also get to choose which invoices you want to factor depending on how often you need to inject cash flow into your business. Unlike a bank loan, you’re not tied into a long-term contract and you can make the most of your invoice terms, taking advantage of the flexibility that factoring offers.
When you compare factoring with traditional funding, you may realize that bank loans are sometimes less advantageous in the long term. You could end up paying more for the access to that capital than you would with factoring, and will be adding on liability on your company’s balance sheet.