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Which is better — invoice factoring or a loan?


May 18, 2015

If you’re having trouble getting approved for a loan, you’re not alone. According to the 2014 Small Business Survey, 44 percent of firms who applied for loans failed to receive any credit. The biggest reasons? Low credit scores, insufficient collateral, and/or weak business performance. In recent years, it’s become more and more difficult for small businesses to access working capital from traditional funding sources.

Fortunately, a loan is only one of many possible solutions. In this article, we’ll compare business loans to invoice factoring, a little-known alternative funding source that could help your business reduce risk, and possibly even pay less than you might for a traditional business loan. If your business is in need of funding, but has a low credit score or limited collateral, you’ll want to check this out.

Fast Approval. Fast Cash.

Unlike loans, which have extensive application requirements and long approval periods the application process for invoice factoring is simple and quick. In most cases, you can receive your funds in as little as 24 hours.

Low Cost. No Interest.

Depending on your interest rate, payment terms, and the amount of your loan, the long-term cost of a loan could be much greater than the amount you intend to borrow. You’ll pay interest over the life of the loan, so carefully examine your amortization documents before signing on the dotted line. In some cases, you may pay as much as double the loan amount.

In contrast, with invoice factoring, you make no interest payments and no monthly payments, because the funds are not a loan. Rather, they are a sale of your accounts receivables (invoices) for work that your business has already completed.

Less Risk. Less Stress.

Risk is inherent in any loan. If your business does well, and you manage your profits responsibly, repaying your business loan may be no problem. However, if business is slow, or if you encounter unexpected financial hurdles, you may be unable to pay your loan, risking late fees, fines, and even insolvency. With invoice factoring, the risk is much lower, because you are not receiving a loan. The money you receive is yours — you are just getting it sooner.

Unlike a loan, which requires regular payments, the funds you receive through invoice factoring will be repaid when your client pays their invoice. If you choose recourse factoring, you will ultimately be liable to repay the funds if your client does not pay their invoice — but this risk can be mitigated with careful credit checks. In addition, many small businesses and entrepreneurs may choose non-recourse factoring, which releases them from liability in the event their clients do not pay the invoice. However, this type of invoice factoring is more costly to obtain. Learn more about the two types of invoice factoring here.

Simple. Repeatable.

While it is possible to get multiple business loans, your approval for each loan will depend on your credit history, which includes your debt-to-income ratio. This means that once you get one loan, it may be harder to get an additional loan until you pay off the first. Because invoice factoring does not involve a loan, but is instead based on your accounts receivable, you can use invoice factoring again and again. As long as you meet the invoice factoring company’s requirements, and your invoices are reliably paid in full, invoice factoring can become an integral part of your business’s long-term plan for growth.

If your business needs access to working capital fast, without the risk, which sometimes doesn’t come with traditional loans, ask us how Triumph, formerly known as Triumph Business Capital can help.