Bank loans represent a popular financing choice for small businesses. However, they often offer a less-than-optimal alternative. In many cases, invoice factoring offers a much better way to get the funding you need.
According to data presented by the Federal Reserve, a typical year will see around 40% of firms apply for a bank loan. And yet, fewer than half of all firms (48%) say that their funding needs are satisfied. Obviously, bank lending leaves a large gap for many companies.
Invoice factoring can fill that hole. This financing option can often provide a better alternative to bank loans. Here’s what you need to know when weighing whether to apply for a loan or pursue invoice factoring:
What You Need to Know About Factoring and Bank Loans
What is the difference between invoice factoring and bank loans?
When you apply for a loan, you present your financial information to a bank or other institution. They judge your creditworthiness and determine whether to take a risk on your business.
If they decide to offer you a loan, you’ll receive a lump sum of money. You’ll have to pay that back, with interest, over a pre-set period of time. That loan will also sit on your balance sheet as a liability.
Factoring has a much different structure. Instead of taking on debt, you receive upfront payment for outstanding invoices.
Yes, the factoring company takes a fee as part of the deal. But you avoid many of the detrimental aspects that come with a bank loan.
In other words, don’t think of factoring as a one-to-one replacement for a loan. Rather, it provides a different financing option altogether — one that offers potential benefits of its own.
Why is invoice factoring better than a bank loan?
There are many circumstances where factoring offers a better choice than a bank loan. Of course, the particular decision will largely rely on the individual situation. But broadly speaking, factoring offers many benefits:
Quicker Approval
You need a quick injection of funds to stave off a credit crunch. Or maybe you’ve identified a once-in-a-lifetime opportunity — one that’s only available for a short time. Chasing a bank loan might be out of the question.
Applying at a traditional financial institution is often a lengthy and complex process. It can stretch out for weeks. This can make loans infeasible as a funding option in a situation where you have to move quickly.
Factoring comes with a much more streamlined process. It provides the perfect choice when you need to respond to changing market conditions.
Lower Credit Requirements
Along the same lines, bank loans are often out of reach for many businesses. Getting funding through traditional institutions often involves clearing a high standard. You have to meet rigorous qualifications and often provide excruciatingly detailed financial information.
This can be intimidating for small businesses or startups. Often, many new businesses don’t qualify.
Factoring offers a more flexible solution. Since the money you get is backed by pending invoices, you don’t have to overcome the same hurdles to receive the cash you need.
No Debt on Your Books
A bank loan represents a long-term decision. Once you take a loan, that becomes part of your overall financial structure. Think of it as getting married to a financial institution.
Factoring isn’t a debt. You’re getting pre-paid for your pending invoices. It has a much lighter touch on your corporate financing framework.
Ready to Take the Next Step! Frontline Funding Can Help!
Ready to look into invoice factoring? Frontline Funding can give you the guidance you need to make the right decision for your business.
Contact Frontline Funding today to learn more.
