.The advantages of factoring over a bank loan can help your small business stay afloat by allowing you to access payments from your clients instead of relying on financial institutions. In an environment with greater competition, businesses need all the help they can get. With this article, we will explain in detail why invoice factoring may be a better option than bank loans for your small business.
What is Invoice Factoring?
Invoice factoring involves selling your unpaid customer invoices to a factoring company in exchange for almost immediate funds. You are paid a percentage of the invoice amount less a predetermined factoring fee.
When the customer pays the invoice amount, it is to the factoring company as per the original payment terms and it deducts its principal along with its fees and rebates the balance back to you.
The Advantages of Factoring Over a Bank Loan
It’s not a loan.
It is an advance on your invoices, which means you pay back the money as you collect payments from your customers.
A bank loan, on the other hand, is a permanent amount of money that gets paid back over time with interest.
You don’t have to qualify.
Invoice factoring is also a great option if you want to use your invoice to get cash now, and don’t have a credit score or a steady income.
A bank loan requires that you prove that you are financially stable. They need proof of income, which means showing proof of at least two years of tax returns. They will also want to see that your business has been around for at least one year, and they may require collateral or other security in case the loan goes bad.
You can work with multiple customers.
One of the biggest benefits of factoring is that it allows you to diversify your business. You can get paid more quickly because you don’t have to wait for your customers to pay or other sources. This means that you can take on more customers, which helps grow your business and make more money in the long run.
You can use it when banks won’t lend to you.
Banks are risk-averse and conservative as compared to factoring companies. They are generally required to lend to established businesses with a track record of profitability. And they are not required to lend to those just starting out. They also have strict criteria for what kind of collateral they’ll accept in order to protect themselves against defaulting on the loan.
But receivables factoring is different from bank financing in that you’re selling your invoices up front at a discounted price.
If you’ve been turned down by your local bank, invoice factoring might be the solution for you.
It saves you time.
You don’t have to wait for your money. Factoring companies are usually able to provide rapid approvals. They then underwrite the factoring facility. Plus, they fund the first invoice quickly as well.
Invoice factoring, like any other kind of lending, has its pros and cons. It’s important to do your research. This way, you can decide if this is a good fit for your business. If it sounds like something that might work for you, then get in touch with Kore Capital Solutions today!