It’s extremely common for growing businesses to seek additional financing. They often need working capital to cover employee payroll, fund renovations or expansion, boost marketing efforts, or manage other expenses. While larger companies typically secure traditional bank loans or lines of credit, small business owners often turn to invoice financing to improve their cash flow.
Invoice Factoring vs. Bank Loans Explained
Factoring
Invoice financing, also known as invoice factoring or accounts receivable financing, helps businesses improve cash flow from purchasing their outstanding invoices. The factor advances up to 95% of the outstanding amount to its client, usually within 24 hours, and waits for the customer to pay at the end of the invoice payment terms.
The factor then sends the remaining balance of the invoice—minus the factoring fee—directly to the client. Factoring companies approve businesses much faster than traditional lenders. Once approved, often in just one business day, a business can begin factoring invoices right away.
Bank Loans
Bank loans, on the other hand, operate a bit differently. Banks advance cash to help cover operational expenses, but unlike invoice factoring, this option involves debt that businesses must repay with interest at the end of the loan term. Not all businesses qualify for traditional bank loans. Financially secure companies with strong credit scores usually secure loans without issue. However, banks often deny smaller companies or approve less than what they need. Traditional banks also take longer to approve loans, making the process slower overall.
Should I Choose a Bank Loan or Factoring?
Invoice financing is a great option if your business needs access to cash immediately, only needs funding on an as-needed basis, or doesn’t want to add additional debt to your balance sheet. Without the fast financing that invoice factoring offers, daily business operations would have to be put on hold. If your business is in good financial standing and would prefer a loan to increase your credit, then a bank loan is a better option for your business.
| Invoice Factoring | Bank Loans |
|---|---|
| No additional debt acquired. | Loan plus interest paid back over time to the bank. |
| No cap on funding. Unlimited potential. | Bank can limit the loan amount. |
| Approved in as little as one business day. | Can be a lengthy approval process. |
| Small businesses are eligible. | Businesses with poor credit will find it harder to get approved. |
Advantages of Choosing Invoice Factoring
Fast and consistent: The whole business financing process is smoother and quicker than a traditional bank loan. Even with small bank loans, your business needs to go through a mountain of paperwork and lengthy approvals. Invoice factoring agreements are known for their speed of getting approved and access to consistent cash flow. The constant cash flow helps companies to stay on top of expenses. Like Porter Capital, top lenders approve you in as little as one business day to start funding your invoices immediately. Waiting to be approved by a bank can be detrimental to a business that is already dealing with cash flow problems.
No additional debt: Your business does not acquire any new debt with invoice financing. The factor advances you 80% to 95% of your invoice amount and waits for the customer to pay. You then receive the rest of the money, minus a factoring fee. There is no interest rate as you are not paying the invoice amount back. The only expense you incur is the factoring fee. The more invoices your business factors, the more consistent your cash flow is, which allows you to manage your debt and improve your credit score.
No funding amount limitations: The amount you factor comes down to your business volume. The more volume your business does, the more you need to factor. You are not limited to the number of invoices you want to send a factoring company. However, a bank will set a maximum amount for your loan. If you need more, you will have to re-apply and go through the approval process again.
Little to no risk: There is minimal risk when working with a factoring company. A factoring company doesn’t need any personal guarantee or collateral as a bank does. You do not need to risk personal assets to factor your invoices and access your cash flow.
If you’re looking for quick access to working capital and want a smooth a quick approval process, contact us today. Click here to get your free non-commital quote.
