Is Invoice Factoring a Better Option than a Conventional Bank Loan?
Whether you are running a small business startup or have a booming business, you often find yourself in a situation where you need to take out a business loan. As necessary as it is to take a bank loan, there are certain problems you face on the way. Invoice factoring is an alternative to conventional bank loans that many companies and businesses are looking up to. Here is what you need to know about factoring vs. bank loans.
How Invoice Factoring Works
Invoice factoring helps you manage your cash flow problems when running a business. This financing approach requires that you get in touch with a factoring company. In a nutshell, the invoice factoring service provider will buy your invoice and collect the money from your customers, while managing some or most of your sales. The process is simple, easy, and effective; here is how it works.
When you have any debt towards your customer, you will present its invoice to the factoring company. The invoice factoring company will make a payment of around 75-90% of the invoice value. The factoring company will collect the invoice value from your customer and pays you the remaining balance. You will then have to pay the fees, including the invoice financing interest rate. The cost of factoring depends upon the factoring company and your agreement with them.
For instance, your business is owed by $100,000 by a customer. You sell the invoice to a factoring company for $90,000. The company collects $100,000 from the customer and then pays you the remaining $10,000. Then you pay the fees and the interest to the factoring company as per the agreement.
In What Ways is Invoice Factoring Better than Bank Loans
When you take a bank loan, the principal and interest rate increases with time, which you have to pay. In the case of invoice factoring, once the factoring company has paid you the entire invoice value, you pay the fees and interest once, and then you are free to pay any remaining debt.
It is no secret that banks are strict regarding loans. They not only reduce your credit scores but also take a long time for loan approval. Bank loans can take months to approve, but with invoice factoring, the approval is very fast and quick. Factoring invoice approval decisions can be made in one or two days. At most, factoring approval can take five to six days, but not longer than that.
With invoice factoring, you have unlimited funding potential, whereas banks limit your funding potential. Invoice factoring ensures you receive working capital as early as possible. With factoring discount, there is ease in your funding potential, and most factoring companies advance you up to 98% of the total amount within 24-hours of the verification.
Invoice factoring for new companies is easier than taking bank loans for a startup. Bank loans do not provide as much flexibility and convenience as invoice factoring startup does.
Where invoice factoring is easier, quicker, and more convenient than bank loans, make sure that the factoring loan rate and the interest are not too high to leave you with a very little profit margin. Choose a company with a factoring business that specializes in your market.