Invoice Factoring vs. Bank Loans

Your business needs working capital so you may be wondering what your options are. Most businesses only think about a bank line of credit; however, there are other options available to you such as invoice factoring which is also known as accounts receivable factoring. Invoice factoring is a fast and flexible way for your business to get access to the working capital you need. 

Account Set Up
The process for setting up an account has many key differences. With invoice factoring it only takes a few days to set up an account and once your account is set up you can expect to get cash in about 24 hours. The quick set up also includes only minimal paperwork and documentation. With the emphasis of needed paperwork being information on your customers, since invoice factoring relies on the creditworthiness of your customers and not on your business like with a bank. With a bank it can take months to get set up with an account and then you get immediate access to the funds. A bank will also ask for a broad range of paperwork and financial statements not only from your business but also from the business owner including but not limited to the operating history for the business, business plans, the business owner’s credit scores.  

Account Limits
Invoice factoring is very flexible when considering the account limit since the limit is based on your accounts receivables. This means that your limit can grow with the growth of your business. With a bank loan you are locked into a certain limit that was pre-established and in order to change the amount you have to go through the set up process again.  

Invoice Factoring Fees vs. Interest Rates
The main thing most business owners and CFOs focus on when comparing invoice factoring to a bank loan is the factoring fee compared to the interest rate you will pay a bank. And yes, at first glance the factoring fee is higher; however, there are added services that many invoice factoring companies provide that a bank does not that can off set or even make factoring less expensive.

EXAMPLE: If a business uses invoice factoring for $100,000 worth of accounts receivables a month with a fee of 2% they will pay $2,000 per month. Which means for the year they will pay $24,000 (12 months x $2,000) in factoring fees and will received $1,176,000 in cash flow. With a bank loan they could be looking at a one time loan of $100,000 with a 12% APR. The business could make a minimum payment of $1,000 per month and will have paid $12,000 in interest for the year and still owe the $100,000 principle on the loan.

Invoice factoring companies will also offer many services that are included with their fee that will help you reduce your overhead expenses. These services can include free background checks on your customers, invoice ledgering and accounting, quick and efficient collections and other back office services.

Additionally, some invoice factoring companies offer no monthly minimums so your business only pays fees on the funds you need each month helping you save money. Whereas a bank will lock you into a line of credit and you must pay the fee on that line regardless of if you need the funds that month or not.

Conclusion
Here is a quick a look at the differences between invoice factoring and a traditional bank loan:

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