Although both processes involve a form of borrowing in order to improve cash-flow, invoice factoring is an entirely different process from taking out bank loans. There are three notably significant differences between taking out a bank loan and employing the services of invoice factoring companies. These are as follows:
3 main differences between invoice factoring companies and bank loans
- Taking out a loan with a bank is a simpler process in terms of the number of parties involved – the party or business looking to take out the loan and the bank deciding whether or not to approve the loan request. Invoice factoring, by comparison, involves 3 parties – the business, the debtor and the invoice factors.
- With banks, the main emphasis is usually on the credit worthiness of the company applying for the loan. This will usually determine whether or not they approve the loan or not. The difference with invoice factoring companies is that the main emphasis will be on the value of the receivables and so is less dependent on the credit worthiness of the company.
- When you employ invoice financing companies, the money factoring is not a loan. A better way of describing it would be to call it the purchase of a financial asset – they are essentially buying your debt from you, in exchange for chasing the payment on your behalf.
It is important to note that when using invoice factoring companies, the factors make funds available – even in situations that banks would not do so. The invoice factoring companies will initially focus on the credit worthiness of ‘the debtor’ – your own customers – as they will be providing the funds. Compare this with a bank loan, where the fundamental emphasis is placed firmly on the credit worthiness of your company as a borrower.
Bank lending is often considered to be cheaper than using invoice factoring companies, but may not be quite as appealing since the main terms and conditions that small businesses have to operate under can be very different.
Small business factoring
If you consider factoring from the perspective of business growth, use invoice factoring companies can be greatly beneficial to small businesses, making possible for them to generate a decent amount of money without being delayed by slow-paying clients. The choice for small businesses is whether to slow their growth or use external funds beyond banks. If they choose the latter then their businesses choice will be between seeking equity or opting for the lower cost of using invoice factoring companies to sell their invoices in order to finance their growth.
Using invoice factoring services makes is easier to access funds as they can be obtained in as little as one or two weeks, which is a great deal faster than securing funds from a bank loan, which could take upwards of six months. When viewed this way, it is easy to see why invoice factoring companies are a popular choice when it comes to factoring for a small business.
If you are a small business looking into the rates and services offered by different invoice factoring companies, you can save time by using a comparison site like Companeo. They can provide free quotes on invoice factoring rates, providing a hassle-free means of finding a factor to suit your needs.
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