5 Reasons Businesses Choose Factors Over Lenders
No matter your business model, product, or service, every company needs one fundamental resource to keep its doors open—cash. If you run a business and are considering the best way to fund your daily operations, you may be weighing the pros and cons of invoice factoring compared to a loan. Keep reading to find out why factoring is a growing trend for businesses like yours.
First, what’s the difference between factoring and a bank loan?
Arguably, the most notable difference between applying for a bank loan and factoring your receivables has to do with debt. With a traditional loan, the bank lends your company money at an interstate rate and obligates you to pay it back. If you do not pay it back, you will be penalized. Penalties often involve the confiscation of whatever property you’ve put up for collateral (this may include your personal property) to match the value of the outstanding balance.
Invoice factoring is not a loan. No debt is incurred; no interest is owed. Instead, a factoring company, usually called the factor, will purchase your invoices from you at a discounted rate. So you no longer own the invoices, and you don’t have to worry about collecting payments from your customers to ensure the factor gets paid.
5 Reasons To Factor Your Invoices Instead Of Borrowing
Okay, let’s look at 5 reasons businesses often choose factoring over a traditional business loan:
1. Shorter Waiting Period
When applying for a bank loan, the application and approval process often takes one to three months. Receiving payment after you’ve been approved sometimes takes an additional week or two. So we’re talking about up to 100 days total.
With Invoice Factoring, the application takes minutes, approval takes days, and payment takes hours. So if you apply on Monday, you could get paid by Friday.
2. Debt-Free Financing
Loans increase debt. If you have the means to pay off that debt without adding worry and stress to your life or business, that may not be a big deal. However, for many companies, especially small to midsize operations, missing a payment and facing the penalties that come with it are fears that never completely go away.
Many businesses prefer factoring their receivables because it does not increase their debt. Instead, a factoring company purchases their invoices outright—debt-free, collateral-free, interest-free.
3. Continuous Financing Whenever You Need It
A loan is often an excellent way to finance a one-time large-scale project, such as new construction or company expansion. But what if you need ongoing funding to cover your day to day operations such as accounts payable invoices, payroll expenses, and general overhead?
We talked a minute ago about the 30 to 90-day waiting period it takes to apply for and access financing from a lender. While requesting a line of credit may work well for a one-time project, it is an unsustainable solution for accessing continuous funding to pay your vendors and cover your daily expenses.
Businesses appreciate the flexibility that comes with invoice factoring. The ongoing cash flow provides peace of mind, particularly because payments are made within 24 hours of submitting their invoices.
4. Financing For Startups
Startup companies face a dilemma because they need to increase their revenue to grow their business. Yet, most banks will not take on the risk of funding an organization that hasn’t been in business for more than two years. Investors can help bridge the gap, but if you don’t have enough investment funding, your business will collapse.
Factoring frees you from depending on bankers or investors to stay in business. By using your accounts receivable to bolster your finances, you gain more independence, resulting in a sustainable business model.
5. Flexible Financing That Grows With Your Business
If you run a growing business and have applied for a bank loan, you may require more funding before the 1 to 3-month approval process is complete. In other words, you might need more money than you applied for before you ever get it.
For growing businesses, invoice factoring provides total flexibility by allowing you to sell your invoices for cash. So the funding you can access accelerates at the same pace as your company expands. With no monthly minimums and a monthly maximum of $10 million, you can rest easy knowing that access to funding is available anytime you need it.
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If you’d like to learn more about how invoice factoring can boost your bottom line, contact Sell My Invoice today. You’ll be glad you did.