Factoring occurs when a business sells its receivables to a 3rd party (factoring) company at a discount. The factoring company pays the business immediately and is paid by your customers later. If you are unfamiliar with the ins and outs of factoring accounts receivables we go in greater detail in a previous article, Factoring & Accounts Receivable Financing.
What you have to understand is that factoring is one of several options that business owners can choose from to obtain funding quickly. There are other options to choose from including cash advances, business bank loans, and lines of credit.
Is Factoring Better than a Bank Loan?
There are several major differences between factoring and most alternative sources of funding including bank loans. Perhaps most important is when you factor your accounts receivables you will not be incurring debt. This could be extremely important if you decide at a later date to take out a secondary source of funding like a line of credit. Factoring also differs from a bank loan in that you will not need collateral and you will not be judged on your credit history but rather the credit history of your clients. If time is of the essence choosing to factor accounts receivables may be the better option as it is much easier and faster than a typical business bank loan.
If you have recently started a business you may find it difficult to obtain financing through traditional banking methods as you may not have established enough equity or credit history to get a loan. In this case, factoring may be your best option.
Is Factoring Better than a Line of Credit?
If you have a business with an established credit history you may be eligible for a line of credit with a traditional bank. While a line of credit has its advantages, invoice factoring is a viable alternative and often times is the better option. Again, if time is of the essence, there are not too many funding options out there with a quicker turnaround time than factoring. Lines of credit take days if not weeks for approval. A legitimate 3rd party factoring company can have your account set up in a day or two.
With lines of credit if you would like to increase the amount in which you can borrow months down the line, you may have to go through an additional approval process. With factoring, as your accounts receivables grows, the amount you are funded grows. Additionally, factoring does not add debt to your bottom line. A traditional line of credit on the other hand does. With invoice factoring, you are moving funds from the accounts receivable line to the cash line and the factor fee is treated as an expense, not a debt.
Often understated but worth mentioning is factoring accounts receivables allows you to focus on your core business instead of collecting debt. With lines of credit you not only add the associated monthly carrying expenses but remain in charge of collecting the debts of your customers. These are just a few of the numerous benefits of factoring accounts receivables.
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CapitalFront was launched with a simple premise – create an easy, accessible and rapid process for small and mid-size businesses to fund their growth. CapitalFront strives to bring a wide array of financial products, including merchant cash advance, receivable financing, factoring, SBA lending and fixed rate term solutions, to independent business owners nationwide. Call today or fill out our online application.