Invoice Factoring vs. Bank Loans

Invoice Factoring vs Bank Loans

Factoring & Bank Loan Comparison

The comparison of factoring vs bank loans comes up often among businesses looking to access working capital. As a factoring bank, The Southern Bank offers a unique perspective on answering this question. We provide businesses in all industries and sizes a broad range of commercial lending options. These include invoice factoring and traditional bank loans. We also help transition borrowers from factoring to traditional bank loans. While factoring and bank loans both inject much needed capital into a business, the two options are more different than alike. Here, we’ll assess factoring vs bank loans to give business owner’s an idea of how these two financing options compare.

Need for Funding

Every business needs funding at some point – to get started, meet payroll, invest in marketing or cover other expenses. Self-funding or borrowing from friends and family often serves as an initial starting place. A business’s primary banking relationship often becomes the next step in the quest for funding. Even though the bank may know the business and owners personally, meeting the lending criteria for traditional bank loans has become very difficult. In cases like this, exploring the differences between factoring and bank loans, as well as other alternate funding sources, makes sense for businesses trying to fully evaluate their financing options.

Bank Loans Difficult to Secure

Although the lending market has strengthened in recent years, the effects of the last financial crisis are still being felt by business owners. In the wake of tightening underwriting criteria, many businesses have faced turndowns by a bank. Bank underwriting criteria are notoriously stringent. As a baseline, applicants need a business plan and solid credit profile to be considered for a line of credit or loan. From there, the “5 Cs” of credit analysis also weigh into the decision.

5 Cs a Bank Uses to Assess a Borrower

• Capacity- Ability to repay, cash flow of business, timing for repayment
• Capital – Money you personally have in the business
• Collateral – For a secured loan, the assets that you will pledge
• Conditions – What the money will be used for
• Character – General impression of the individual


With all this information the bank will then make a risk determination and assess confidence in the business’s ability to repay the commitment. The bottom line is that traditional loans are hard to secure. Even if a business does get approved for a loan, it’s often not for the full required amount the business needs.

If the Bank Tells you “No”

While a business should explore traditional options, management should not get discouraged if the bank comes back with a “no” for a loan or line of credit request. It is not uncommon for a business to be turned down. Even if the bank can’t extend a traditional bank loan, the bank can provide a referral for an alternative type of funding if one is not available in-house. Here at The Southern Bank, we maintain the unique position of serving businesses as a factoring bank. When a primary banking partner can’t help, we step in as a FDIC-insured factoring partner to help the business in need.


Independent factoring companies and finance companies also operate in this space. Many of these companies function as a middleman and don’t have the same direct access and low cost of funds as a factoring bank partner. There is also a lot of buzz around online lenders and newer alternative funding sources. Many of these companies lead with very low teaser rates or sneak in complicated deal structures. As you determine if factoring or another alternative funding option can work for your business, be sure to fully vet a stable and trustworthy financing partner.

Is Factoring a Fit?

When traditional bank loans aren’t a fit, invoice factoring provides a fast and flexible way to fund a business. Factoring helps a business unlock the value tied up in its accounts receivable. Hence, the alternate names accounts receivable financing or accounts receivable factoring also describe factoring. In invoice factoring, a business sells its invoices to a factoring company in exchange for an advance on those funds. Factoring allows business-to-business firms the ability to get out from under a cash crunch by accelerating the business’s cash flow. See this How Factoring Works diagram for more detail.

Although factoring has been around as long as people have been trading goods, many business owners don’t know about factoring. Since most business owners have an understanding of how traditional bank loans work, we’ll take a look at factoring vs bank loans from this perspective.

The Main Differencesfactoring vs bank loans

As the chart summarizes, speed and flexibility are the drivers behind the difference between factoring vs. bank loans. We’re here to answer any further questions you may have.

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