Factoring vs. Banks Loans: Which Option is Right for You?

As businesses grow, they often find themselves in need of additional working capital. From unforeseen expenses and slow-paying customers to a sudden influx of business, there are multiple reasons why cash crunches can happen. Yet each of these cash flow situations requires the same thing: quick cash.

In a pinch, a lot of business owners turn to the traditional bank loan. However, for many companies, qualifying for a bank loan may be out of the question or not the quickest financing option available. More often, cash solutions like invoice factoring are a more attractive option. Before you run to the nearest bank, let’s take a closer look at what is really best for your small business – factoring vs. bank financing.

Traditional Bank Loan

In a typical loan structure, the lender provides a business owner with cash, which must be paid back, with interest, over a predetermined period of time. Because approval is based on a business’ operational and credit history, small startup businesses that have not been established for long have a hard time securing traditional bank financing. Banks are hesitant to lend money to businesses that do not have adequate income and assets. 

Another obstacle business owners encounter is timing. The application process for a bank loan is known for being complicated and lengthy, to the point where you could wait months for approval. Meanwhile, your business is still in need of cash to cover expenses, pay employees and fund opportunities. Funding potential is also capped by banks. Down the road, when your business needs additional financing, you may find yourself right back where you started: applying for another bank loan and taking on more debt.

Invoice Factoring

Invoice factoring is a financing tool that helps businesses stabilize cash flow by unlocking cash sitting in unpaid receivables. Also known as accounts receivable factoring, this process involves selling unpaid invoices to a factoring company at a discount. The factoring company then quickly advances the funds needed against the business’ outstanding invoices. This initial advance is known as the “advance rate” and typically ranges from 80% to 90%.

While the factoring company is busy working on the collections process, your business operates as usual. You may even submit new eligible invoices for funding during this time. Once the factoring company collects payment from your customer, you will receive the remaining balance of the invoice, minus any factoring fees.

Here are just a few reasons why invoice factoring is a clever alternative to a bank loan:

Raise funds without acquiring new debt

Debt is risky. Unfortunately, many business owners assume taking on some “healthy” debt is the fastest way to take their business to the next level. Of course, the majority of business owners would prefer to raise cash without borrowing money and acquiring new debt. Fortunately, factoring invoices provides the working capital you need on money your business has already earned and is waiting to be paid. This allows you to avoid taking on new debt.

Secure cash quickly and when you need it most

Cash crunches are not always negative. Sometimes, businesses experience sudden success and receive an influx of business; this rapid growth may require buying raw supplies, increasing staff and investing in machinery. If sales are increasing faster than accounts receivable are coming in, cash flow can get tight. In addition to providing a debt-free solution, factoring invoices puts cash in hand fast.

Approval is based on a wider range of factors

Although banks are working to improve business lending, it is harder than ever for new and small businesses to qualify for traditional loans. Many banks focus solely on the business owner’s credit history to determine loan worthiness, while others also consider collateral, the current amount of debt, time in business, industry, etc. In contrast, invoice factoring looks at a wider range of factors. An invoice factoring company will consider both your credit score and the creditworthiness of your business’ customers.

Utilize a financing option that grows with your business

Unlike a bank loan, the amount of capital available from factoring invoices grows with your business. As your business grows, your business’ credit line can be reviewed for increases. This funding potential is one of the biggest reasons business owners choose invoice factoring over traditional lending. Invoice factoring meets a business’ present and immediate cash needs and protects its long-term financial health, making it ideal for a growing company.

Break out of business plateaus

Invoice factoring can help your business break through business plateaus to seize opportunities and achieve sustainable business growth. When a potential new customer approaches you, your business will have the cash it needs to say “yes” to the job, purchase supplies and cover payroll. Your business gains a new customer and takes a step towards further growth. Invoice factoring ensures you can maintain your current customer base and still be in a position to serve new customers that will help your business expand.

Invoice factoring is a great alternative to the traditional bank loan. All in all, this flexible business funding option provides access to the quick capital you need to build a strong source of cash-flow for growth, while also avoiding the vicious cycle of debt.

Security Business Capital’s Invoice Factoring Services

At Security Business Capital, we know small businesses often face unforeseen cash flow situations and need capital to cover those costs quickly. Security Business Capital has built an experienced and dedicated team of individuals with years of expertise in providing flexible cash flow solutions that help businesses thrive. If your business is seeking alternative financing solutions to meet expenses or fund growth, we offer a fast, simple and hassle-free set up process.

If you are interested in learning more about how our invoice factoring services work, contact us today for a free quote or consultation.