When you’re a business owner, you will sometimes need to take out a business loan. However, getting a bank loan is not always the best option. This is especially true when you need cash to pay some overdue bills, buy new equipment, or invest in a profitable venture with a short window of opportunity.
Bank Loans Take Time
Traditionally, most businesses take out a loan from a bank. This can be an excruciatingly slow process, and it will take an eternity if you still want to compare loan rates from several banks. On occasion you may even go through this interminable process only to find out that the bank won’t grant you the loan.
For traditional bank loans, there are several things you can do to speed up the process and to increase your chances of getting approved. In general, you need to make sure you have a good credit rating and credit history. You also need to have verifiable income and profit, as well as enough assets to use as collateral. You must have all your documentation ready when you make your application. But even if you have complied with all the requirements, loan applications could take a week or more. Fortunately for you, there’s another way to secure a “loan.”
Factoring, which is sometimes called accounts receivable financing, involves exchanging your accounts receivable for about 80% of its value. The remaining amount will then be held back until the full payment is collected. The factor handles all the transactions, credit assessments, and collections, and receives a fee for their services. The factor usually charges a certain percentage (2% to 3% is common) of the face value of the accounts receivable, with a tiny percentage penalty for late charges.
The two most notable advantages of factoring are that first, the application process is much faster compared to taking out a bank loan. It’s not unusual for the approval to be given within just a few days after all the requirements have been met. The other main advantage is that the payment for the loan depends on the flow of customers. During lean times when business is slow, the factor can also adjust your payment amount.
There are still even faster ways of getting a loan, although they come with rather serious drawbacks:
- Using a credit card is a popular form of business financing, and if you already have a credit card then it could prove to be the fastest way to get a business loan. However, the interest rates can be truly high, and the penalties for late payments can have dire consequences on your finances.
- Another relatively quick way to get a business loan is you use your friends and family as a source of financing. About $89 billion are borrowed from family and friends in the US alone every year. This may result in lower interest rates and more flexible payment terms, although most experts say that borrowing money from people you know can damage personal relationships.
It’s obvious that when comparing all possible ways of getting a loan quickly, factoring is the most viable alternative to get a business loan. It allows you to get the money you need quickly, and the interest rates and fees are more than reasonable.