Invoice Factoring Vs. Traditional Bank Loan: A Comparison

By Per Frennbro in Fast Financing

Did you notice that invoice factoring has been gaining a lot of popularity? It offers a number of advantages to small and small-medium businesses. This is the main reason why businesses are turning towards invoice factoring from traditional bank loans.When it comes to approval of loans, banks have become restrictive, leaving the companies with poor credit history hanging! Are you a small business owner and can’t decide whether to opt for a bank loan or invoice factoring? Need help? We have got you covered! Here’s a brief comparison between traditional bank loans and invoice factoring

The process of getting approval for a loan from banks is quite lengthy and complex. It not only requires a lot of paperwork but also has strict requirements. It can take days to weeks and in some cases, even months! And the worst part is that after waiting for so long, you may not even get approval for the loan. This can be really frustrating. This is exactly where invoice factoring outruns traditional bank loans. It involves a simple process that lets you get upfront for your accounts receivable. Your funds get released almost immediately and you can get the capital that you need within less than 24 hours.

In case of bank loans, you always have the burden to repay loans. But with invoice factoring, the case is not the same. You will not get involved in long-term debt. Here, you are leveraging only the collection of future invoices, resulting in a reduced accounts receivable balance and increased cash balance.

What no one is considering is that a bank loan’s interest is running 365 days per year while if you get single invoice financing it is on that amount for as long as the invoice remains unpaid. On average this is 45-54 days in Europe for invoices which is substantially less than a bank loan for a year or two.

It is often that the banks require businesses to use the business assets as well as personal assets as collateral. Are you willing to take that risk? If not, then invoice factoring is for you. As it involves no personal guarantees, you don’t have to risk your personal assets in order to finance your small business. Now, that’s better, isn’t it?

Do you want to get a huge sum of bank loan? There’s a maximum amount that you can borrow from banks. If you reach the limit that you have been approved for and need additional funds, then you will have to re-apply. This may take a lot of time. On the contrary, the amount of cash that is available through invoice factoring is directly related to the volume of your sales. You will be able to factor more invoices if you can close more sales. With your increased volume of sales, you can have your hands on more cash through your receivables.

There are restrictions on bank loans that limit the way you can use the loan proceeds. In fact, it can also prevent you not only from incurring additional debt for any reason but also from purchasing and selling business assets over the loan period.This does not give you the freedom to make use of the resources the way you actually need to. But with invoice factoring, the case is different. It is the creditworthiness ofyour customers and not your own credit history that determines how much you can get from your invoices.

So it’s time to decide the best option for your small business – bank loans or invoice factoring. Well, if you want to get immediate cash flow without creating any debt on your balance sheet, invoice factoring is definitely a better option. It’s an unlimited source of working capital. Could you ask for more?

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