5 Ways Invoice Factoring is Different Than a Loan

On the surface, invoice factoring and bank loans appear similar. They’re both excellent options for securing funds for your business. However, as you dig deeper, you’ll find that there is no shortage of differences. 

Here are five ways invoice factoring is different from a bank loan:

1. Invoice Factoring Is Debt-Free

This may be the number one difference in how you compare invoice factoring vs. bank loans. 

With invoice factoring, you’re getting an advance on an invoice that your client will eventually pay. In exchange, you pay a small fee to your invoice factoring company. 

Conversely, a bank loan is money that you borrow and are required to repay, with interest, over a predetermined term. For example, you could borrow $100,000 at seven percent interest to be repaid over 10 years. 

Between the two, invoice factoring gives your company more financial freedom. You avoid the feeling of being bogged down by debt. 

2. The Application Process

The bank loan application process can be long, complicated, and tedious—none of which you want to deal with when trying to manage a business. Additionally, it can take several weeks or longer to receive an approval (or denial).

Getting started with factoring is a much more efficient process. In fact, if you qualify and have all the required information available, you can initiate the process within a matter of days. This allows you to secure funds just as quickly.

When it comes to managing your company’s finances and cashflow, you must be able to move quickly and without outside sources slowing you down. Invoice factoring allows for all of that. 

3. Funding Timelines

This goes hand-in-hand with the application process. The longer it takes to complete an application and receive an approval, the longer it takes to get your hands on the funds. Sometimes this can take weeks as you wait for a response. 

The funding timeline associated with factoring is much shorter than a bank loan with some factoring companies offering same-day funding. If you need money fast to run your business, factoring is one of the quickest ways to do so.

4. No Limit With Invoice Factoring

With most banks, there’s a maximum amount of money you can borrow. And that’s especially true if you’re a small business, new business, or organization without an established credit history. 

Invoice factoring is only limited by the number of qualified invoices you send to your factoring company. As long as they accept them, nothing is stopping you from sharing more. A factoring facility grows with you and your sales so you never have to worry about maxing out.

To better understand this difference, request information from your local bank about borrowing limits. 

5. Credit History and Credit Score

With a bank loan, the lender considers your credit history and credit score. If you meet the credit requirements, you will have to make sure that payments towards your loan are done on time to avoid late notices on your credit reports. If you don’t meet the strict requirements in the first place, your business won’t be able to borrow money. And that puts you back at square one.

Invoice factoring is different in that your company’s credit history and score don’t factor into the equation. Your chosen factoring company is concerned about the history and score of your customers. If they have a good track record of paying in full and on time, that works in your favor. Additionally, factoring your invoices won’t affect your credit history and score, since you’re not borrowing anything. 

Invoice Factoring vs Bank Loan: How to Compare

The five differences above should help you understand that invoice factoring and bank loans are entirely different. There are pros and cons of both—and you could use both—but you don’t want to confuse one for the other.

Here are three steps you can take when comparing both options:

• Get on the phone: In addition to personal research, consult with an invoice factoring company and lender to gather more information. The best way to do this is via phone. This allows you to ask questions specific to your company. 
• Know your goals: Anyone can compare the finer details of invoice factoring and bank loans, but that doesn’t do you much good if you’re unsure of what you want to accomplish. Make a list of short and long-term goals to guide you. 
• Review your finances: Before making a final decision, review your finances to ensure that you’re getting what you need. For instance, if you need quick cash to maintain positive cashflow, invoice factoring is generally best. But if you need a lump sum of money and can afford to wait a long time to receive it, a bank loan makes more sense.

Once you take these three simple steps, you’ll have a clearer view of what to do next.

Frequently Asked Questions

As you take the steps above, you can expect to have questions regarding invoice factoring and bank loans. Some of the most common include:

• How much do invoice factoring companies charge?
• What is the average interest rate of a bank loan?
• What are the different types of bank loans?
• What are bank loan eligibility requirements?
• Will invoice factoring companies work with businesses in any industry? 
• What happens if you default on a bank loan?
• How much money do you need to borrow?

You get the point. These are the types of questions you should address before deciding what comes next. 

REV Capital for Your Invoice Factoring Needs

Once you decide in favor of invoice factoring, it’s time to find a company that meets all your requirements. This is where REV Capital can help. 

Get this: we have 1,400+ active clients, process 3,800+ invoices every day, and fund $3 billion annually. In other words, we know the industry inside and out.

If you’re ready to get started, apply online or contact us via phone at 855-879-1511. One of our experienced team members can answer your questions, walk you through the application process, and ensure that you can get started when you’re ready.