Three Factoring Misunderstandings Explained

“When it comes to solving cash flow problems, a business really has to choose between factoring and a bank loan. These two are the only real choices that a company has . The third option, failing to fill new orders until cash flow resumes, is widely recognized as a bad idea because this will lose potential new customers who could be a future help in avoiding cash flow problems.

Unfortunately, many people do not understand the differences between these two, primary alternatives. As a consequence, companies will invest a lot of in seeking a bank loan without giving proper consideration to the invoice finance option. There are three crucial differences between the two which may make you look at invoice finance in a new light.

Invoice factoring is quick compared to the loan process at a bank. Getting a loan will require you to begin turning the bureaucratic wheels of a financial behemoth. There will be a series of meetings and multiple submissions of paperwork. You will have to divert resources to the process and slow down your business operations as a result.

Factoring, on the other hand, is very quick. This is especially true if you have previously factored with your invoice financer. With a bank, every loan will require a lengthy process controlled by endless regulations. Invoice finance is just a business deal. You are selling your invoices to someone and negotiating a rate. If you have already done so before with a factor, then the transaction can happen in minutes.

There are no strings attached when you factor your unpaid invoices. When you get a loan from a bank, you are entering into a long-term relationship with a creditor. You will have to manage monthly payments and meet requirements set by the bank. The bank will essentially have an interest in your business. Furthermore, the loan will appear on your balance sheet as a liability.

Invoice discounts, on the other hand, are simply business deals. Once they are done, there is no need to think about them anymore. The factor walks away with the products that he or she wanted: the unpaid invoices. You walk away from the deal with your cash. If you never need or want to factor your invoices again, there are no drawbacks. Each interaction with a factor is simply a business transaction.

When you talk to a bank about your loan, there will be an initial pause while the bank reviews your credit rating and calculates an interest rate if they approve of your credit history. When you factor your invoices, you do not have to worry about how your credit rating looks or deal with the consequences of a poor rating. The factor is primarily interested in your clients ability and likelihood of paying.

With these misunderstandings cleared up, it should be easy to see that invoice finance is a good option for many businesses. The speed and the lack of strings attached to the deals are probably the most important issues for any business. More businesses opt for factoring every day because of these issues.”