When a small business needs a loan, there are some 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. These businesses will likely find it very difficult to get money loaned to them; whether from a bank or 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. Invoice factoring is not a loan but a type of financing which requires that a company has good paying customers 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.
Invoice Factoring VS Small Business Loans
Doesn’t require taking on debt
Factoring does not expect that a company takes on additional debt. While it is often necessary for businesses to borrow money 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.
Companies receive money quickly
If a company needs money fast, there are few better options than invoice funding. In less than seven days, a company can obtain a large portion, up to 90% of their outstanding invoices. Companies with an 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.
To receive a bank loan or a line of credit, it is necessary to provide some proofs that you are a good credit risk. A company will need to give all of its financial statements, have excellent credit and have been in business for a good amount of time — generally more than three 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 much 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, there is no need to reimburse it. As a result, there are no payments, principal, and interest to be made. Companies pay back the factor after they collect the invoices.
Factors handle collection duties
Not only will a factor give a company a lump sum of money up-front, but 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.