Quite a few businesses these days have heard of factoring, and they’re now comparing factoring to line of credit to see which one works out better. To make this comparison, let’s take a closer look at each.
How a Line of Credit Works
The first step is to apply for a line of credit from your bank. With a line of credit you get a maximum limit of money you can draw from a bank and you don’t have to take out all the money at once. It’s much like having a credit card for your business. If you have a $100,000 limit then you can borrow the full $100,000 or borrow only $10,000. You then pay only the interest on the amount you borrow and the principal amount.
Getting approval for a line of credit these days can be a very long and complicated procedure. You better make sure that your credit is very good, otherwise your application may just be denied or you won’t get the limit you want. And if you reach the limit then you have to renegotiate with your bank for an extension.
How Factoring Works
With factoring, you don’t go into debt at all. You simply send your invoices to your factor, and they give you a set percentage of the value of the invoices in advance. For example, if you have an invoice for $100,000, then you can get anywhere from $70,000 to $90,000 in a few days (or even in just one day). You don’t have to wait for the due date on the invoice which can be for 30 or even 90 days. Once that customer pays the factor in full, you are sent the rest of the payment, with the factor pocketing the fees from that payment.
Getting approval for invoice factoring is very easy and your personal credit isn’t even an issue. And you can also control the amount of money you receive. If you need more money in advance, then you simply send more invoices to the factor for an advance. Your factor can help you keep track of your invoices, they can do the collecting, and they may even investigate which clients have a good record of paying in full and on schedule.
So which one is better for your business? If you can get a line of credit from a bank quickly and the interest rate is reasonable, then that’s your better option. But that’s a very big if. Credit card companies can really charge a lot in interest. And for that reason, many businesses are opting for invoice factoring.
With invoice factoring, you are much more certain of getting approved and the entire process is much faster. Once you get approval, you get your money very quickly. And there’s no debt involved that can further affect your credit rating. You may even get additional services that make your entire operations much more efficient.
It’s up to you to decide which one is better for you when you’re comparing factoring to line of credit. But for practical purposes, it’s pretty much obvious that factoring is better, because aiming for a line of credit is useless if you can’t get it anyway.
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