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:
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.
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.
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.
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.
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.
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:
Once you take these three simple steps, you’ll have a clearer view of what to do next.
As you take the steps above, you can expect to have questions regarding invoice factoring and bank loans. Some of the most common include:
You get the point. These are the types of questions you should address before deciding what comes next.
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.