As anyone who has applied for a bank loan knows that the application processing and approval times can stretch into weeks. Factoring, on the other hand, can often process an approval the same day a completed application has been turned in.
Which One is Right For my Business?
Application Processing Times
Funding Covenants
As a condition of extending a loan or line of credit, many banks require specific covenants of a business. These can cover things such as requiring a business to keep certain key employees with your business or maintaining a particular debt-to-asset ratio. If these covenants are broken, a bank can demand payment in full for all outstanding loan amounts. This gives a bank a great deal of power over the operation of your business. Factoring is not debt, and as such generally does not have covenants as a part of a factoring agreement.
Approval Processes
Bank loan approvals and rates are highly dependent on business collateral and credit. Invoice factoring is more interested in the quality of your debtor’s credit, since their invoices are what is being purchased. This allows businesses with no collateral or established credit to access funds that would otherwise be out of reach from traditional lenders.
Funding Flexibility
Bank loans and lines of credit are difficult to change once obtained. Oftentimes, any increase will trigger an audit and renegotiation process that can take weeks or months to get approved. Invoice factoring is much more flexible and is built to grow as your accounts receivable grow. No renegotiation, no additional terms.
Additional Services
When you receive a bank loan or a line of credit, the money is all that you get. Good factoring companies provide their clients with vital back office, credit reporting, and collections services that add value above and beyond the bare cash provided.