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How Factoring Differs from a Bank Loan

When you’re building a business, you should take advantage of a diverse set of funding options. It’s important to understand the ideal choice for each scenario. While factoring and bank loans can both act as a useful source of funds, each fits a distinct set of circumstances.

These financing alternatives come with widely different structures. For a bank loan, you borrow money that needs to be repaid with interest. Factoring involves receiving cash for unpaid invoices. These contrasting formats suit discrete business scenarios.

To get a better idea of when factoring presents a better option than a bank loan, we’ll highlight the ways this form of funding differs from a traditional bank loan. With that information, you’ll see when it provides a superior alternative for your business. Here are some distinctions that mark the factoring process:

What Makes Factoring Different Than Bank Loans

Easier Process

Like insurance companies, banks love paperwork. Any decision by a major lending institution requires a lengthy, detailed process. As such, you face a burdensome path to the cash infusion you need. By contrast, invoice factoring presents a relatively streamlined procedure. As a result, you’ll be able to acquire the resources you need with less effort.

Gets You Cash Sooner

An easier set of procedures has benefits beyond avoiding headaches. The streamlined nature of invoice factoring also speeds your journey through the process. As a result, you can get your cash faster.

In some cases, this is just a matter of convenience. It’s nice to accelerate the delivery of the money. However, in other situations, this speed becomes vital.

Invoice factoring represents an excellent option in emergency scenarios. A loan generally becomes unobtainable in extreme circumstances, at least under reasonable terms. Invoice factoring, on the other hand, exists as a great short-term alternative.

Avoid Long-Term Debt

Ultimately, loans don’t protect your cash flows. They undermine them. By borrowing, you receive a one-time influx of cash. But you also add to your overall expense, as you need to repay the loan and service the interest.

Invoice factoring operates differently. You aren’t borrowing money. Rather, you are receiving upfront cash for pending invoices. This limits your ongoing obligations and lets you smooth your cash flow without sacrificing its future.

You Don’t Need High Credit Scores

Invoice factoring transactions don’t depend on your credit score. Rather, companies will look at the credit worthiness of your customers — the entities that are responsible for invoices that form the underlying asset involved in the factoring transaction.

Because of this dynamic, factoring offers an easier path to cash for new ventures or companies that have faced hard times in the past. If your credit score puts most loans out of reach, you can still pursue invoice factoring as a source of funds.

No Additional Collateral Required

Securing a lender often requires submitting some of your assets as collateral. Without backing the loan, you might not be able to receive approval. Or, even if you do, the interest rate will become exorbitantly high.

That isn’t the case with invoice factoring. The cash you receive is based on your invoices — you don’t need any additional collateral. The invoices themselves serve as the foundation of the transaction.

Factoring offers an excellent funding choice in many common business scenarios. With the right partner, like Frontline Funding, you can secure your cash flows and set yourself up for long-term success.

Contact Frontline Funding today to learn more about your financing options.

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