Invoice Factoring vs Bank Loans

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Invoice Factoring vs. Bank Loans

Last Updated on November 4, 2022

Every business needs funding at some point – some need it just to get started, others need it to meet payroll, and others still need it invest in marketing or cover other expenses. Self-funding, crowdfunding, and borrowing from friends and family are common starting places when you find yourself needing to fund your business, but a business’s primary banking relationship often becomes the next step in the quest for financing.

As a factoring bank, altLINE by The Southern Bank Company offers a unique perspective on comparing traditional bank loans to factoring. We provide businesses in all industries and sizes a broad range of commercial lending options, including invoice factoring and bank loans. We also help transition borrowers from factoring to traditional bank loans. If you’re trying to learn what the differences between these financing options are and which is best for your company, you’ve come to the right place! Read on to learn more about the difference between invoice factoring and bank loans.

But First, What is Invoice Factoring?

Most people already know what a bank loan is, but factoring may be a new concept. Invoice factoring is an alternative financing option in which a business sells its outstanding invoices to a third-party factoring company (often referred to as a factor) for a discounted rate. The factor provides a cash advance to the business that sold the invoice (typically 80 – 90% of the invoice face value) and works with their customers to collect the invoice payment. Once payment has been collected, the factoring company pays out the remaining invoice value minus a small factoring fee.

Invoice Factoring vs 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 financing through factoring vs bank loans to give business owners an idea of how these two funding options compare.

Invoice Factoring Bank Loans
Quicker and easier approval process Longer and more difficult approval process
No collateral is needed Loans are secured against collateral
Factoring is not debt Debt is incurred
More flexible financing and funding limits Funding potential is limited
Approval is largely based on your customers’ creditworthiness and reliability Approval is based on your credit and business operations
You can be approval with poor credit You need to have strong credit to be approved
Tends to be more expensive in the long run Tends to be more affordable in the long run

Approval Process

  • Factoring: Getting approved for a factoring line can happen in as soon as a day, and it is typically much easier to be approved for.
  • Bank Loans: Traditional bank loans can take weeks to complete the application process, and banks tend to be stricter on who is approved.

Credit

  • Factoring: Personal and business credit values are less important. Factoring evaluates the creditworthiness of a business’s customers. This makes factoring an appealing option for individuals without a strong credit history.
  • Bank Loans: In-depth credit analysis provides banks a risk profile for the individual and business seeking traditional loans. Credit standards are tough to meet and often prohibit borrowers from receiving funding.

Related: How to Finance a Business Without a Loan

Structure

  • Factoring: As the business grow and receivables grow, so does the availability for working capital. This gives the business greater borrowing flexibility.
  • Bank Loans: The structure of a bank loan or line of credit requires a predetermined dollar limit. Once that level is reached, trying to gain additional capacity (i.e. working capital) is difficult.

Cost

  • Factoring: Invoice factoring rates are relatively low, but they can add up over time. Our rates are typically anywhere between 0.25% and 3.0% of the invoice face value. Additionally, the quicker a customer pays, the lower your rates typically are with factoring.
  • Bank Loans: Banks tend to offer lower interest rates, making loans a cost-effective financing solution for businesses with good credit. If you are willing to negotiate terms and loan structure, you are also likely able to get an even better deal.

Should I Choose Factoring or a Bank Loan?

Now that you understand some of the key differences between invoice factoring and bank loans, you may be wondering which you should choose. We’ve broken down some of the top considerations for each below.

You May Choose Invoice Factoring If…

Invoice factoring can be an excellent financing solution for certain types of businesses, especially startups and small businesses, staffing companies, and various industrial companies (though businesses of all sorts can benefit from factoring). You may want to explore factoring as a funding option if:

  • You do not have strong business credit
  • Your customers pay on time
  • You need quick cash
  • You need ongoing and scalable financing

You May Choose a Bank Loan If…

Traditional bank loans are a tried and true financing solution for businesses across the country. This option may be great for your business if:

  • You have good business credit
  • You have been in operation for years
  • You have large assets to your name

If you meet the requirements for a traditional bank loan, this may be your best option. However, for many businesses out there who have poor credit, limited operating history, or limited assets to borrow against, those loans and lines of credit may not be an option.

For those businesses, we recommend learning more about invoice factoring and finding out how it might be a more efficient, affordable and reliable alternative form of cash flow financing.

If the Bank Tells you “No”

While a business should explore traditional options, business owners 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 altLINE, 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.

If you’ve applied for a bank loan and have been turned down, fill out our quote form to see if we can finance your business through factoring instead.

FAQs

Still have questions? Check out some commonly asked questions about invoice factoring and bank loans below:

Is factoring considered a loan?

Invoice factoring is not considered a loan, and a business does not take on debt when financing through factoring. Instead, invoice factoring is the selling of your invoices at a discounted rate in return for a cash advance.

Why might a company choose factoring instead of a loan?

Invoice factoring has many benefits, especially for those who may struggle to get approved for a traditional bank loan. The factoring approval process is typically much quicker and less strict than the loan approval process, making it easier for businesses to qualify and get funding when they need it most. Additionally, funding tends to be more flexible with factoring than with bank loans, which can be helpful for a growing business.