Factoring vs. Business Loan
Today, many small business owners are constantly looking for new ways of improving their cash flow – given the current condition of the economy. In the olden times, the usual recourse is to go to a bank, but this move isn’t anymore feasible given today’s tight credit market.
It is very hard for a new small business to even get a loan. You may have heard that Bank of America recently extended more than $12 billion in credit to small businesses, and they consider a small business to be one with revenues up to $20 million. In this sense, many small business would not qualify for this.
Anyone would not always think about invoice factoring, or accounts receivable funding, when his/her business would require cash flow or a working capital for the business. Why is this so? The answer is straightforward: many people immediately think of a bank when they are looking for financial aid.
Accounts receivable factoring is not a typical “bank product” so this option is confusing for most business owners.
Normally, a business owner seeks for working capital, which is also referred to as a line of credit, or credit line. And based on pledged collateral assets, your limits are dependent on them in conventional funding strategies.
Availing of small business loans is beneficial for one who basically needs a lump sum of money immediately. If you can get one, great. These days, on the other hand, this is a very challenging feat. This is where small business factoring can help you – by providing you steady and reliable cash flow. By selling your invoices, or factoring the invoices in return for an advance of funds, it’ll cost up to a percentage of the invoice value.
Benefits of factoring over traditional small business loans or overdrafts include the following areas: You get easy access to funds. Business loans need time before the funds or overdrafts are credited in your bank account. A factoring firm provides funds within 24 hours of invoices being issued. If you take out a small business loan, you’re only allowed to borrow a fixed amount, and once you reach that limit, you will then need to renegotiate with your lender.
Business owners who make use of invoice factoring acknowledge the flexibility of the financial option – as their sales grow, so will your business too. With this, then you can now concentrate on generating more sales – and not chasing payments – and this is good for your business.
Now, if you have considered this method over other financial alternatives (like business loans, overdrafts), know that first and foremost, the factor company shall take a minimal percentage out of its value. Extra fees may be incurred if you decide to outsource credit management. It’s still important to take out credit protection – even if the factor company will fund your invoices, you’ll still be liable for bad debts should the payees not settle.
Borrowing the funds to finance your business through its various growth stages as well as the economic forces can be achieved in a lot of ways, but invoice factoring is becoming more popular, because it is an easy way to swiftly measure the return on investment (ROI). And there are no loans to pay back.
