Businesses often need additional cash for a variety of reasons. Whether you need money to keep up with expenses, marketing or hiring more help, it’s important to be able to get the funding you need. People usually look for funding via a bank loan first. However, this isn’t your only option. Invoice factoring is another type of financing that actually has quite a few benefits. Let’s look at how these two types of funding compare.
An Introduction to Invoice Factoring
Almost all businesses have at least considered a bank loan and understand the fundamentals of how they work. Not everyone, however, is familiar with invoice factoring. This is a process where the factoring company purchases your customer invoices from you, allowing you to get immediate cash. The steps involved are quite simple:
- You submit the invoices you want to use for factoring. The factoring company establishes a credit limit for your customers.
- You deliver the products or services to your customer as usual.
- After verifying that the customer has gotten their products/services, you receive cash from the factor.
- Your customers pay the factor in 30, 45 or 60 days according to the terms of the invoice.
This is an efficient way to get paid right away rather than having to wait for clients to pay. When you factor your invoices, you can use your enhanced cash flow for any purpose you want, such as buying equipment, making payroll, advertising or expanding your space.
Advantages of Invoice Factoring vs Bank Loan
While both can be used to fund your business, there are quite a few differences between bank loans and invoice factoring.
- It’s difficult for startups to obtain bank loans. By contrast, startups are eligible for invoice factoring.
- Banks base approval on strict criteria such as number of years in business, your credit history and profitability. With factoring, approval is based on your clients’ credit history rather than yours.
- Banks limit your funding potential. With factoring, funding potential is unlimited.
- If you are approved for a bank loan it can take months for the money to be available to you. When you factor your invoices, you get approval within a matter of days, and funds within 24 hours.
- With loans, you have to repay interest and principal. However, with invoice factoring, you have no debt to repay.
Invoice Factoring: An Alternative Worth Considering
When you compare invoice factoring vs bank loan terms and conditions, you can see why many businesses prefer factoring as an alternative financing option. For newer businesses that aren’t approved for bank loans, factoring is a feasible way to get the funding they need. Even if you can get a loan, factoring can be a faster and more reliable way to get immediate cash. It’s also a way to get the funding you need without taking on additional debt.
Invoice factoring is a simple yet powerful way for businesses to quickly improve their cash flow situation. If you want to learn more about how invoice factoring works and how it can benefit your business, contact Riviera Finance, the experts for more than 49 years.