How It Works with Banks and Factoring Companies

If you need additional financing for your business, the first thing you need to do is to take stock of your current situation. For that, you need to ask yourself several important questions which will give you a better idea of which financing solution to seek. That’s because the banking industry and the factoring business do things differently.

How Soon Do You Really Need the Money?

If you can wait for a few months, then perhaps the banking industry may provide the answer by giving you a traditional loan. That’s because applying for a loan from a bank is a protracted process that can take an entire month, even if you apply to the first bank you see.

A bank is quite meticulous when it comes to evaluating and investigating a borrower’s credit worthiness, and it will need a ton of documents to prove that your business can pay back the loan eventually.

On the other hand, if you need the money as soon as possible, then the factoring business may be the best solution to your problem. A factor may offer any of the alternative financing solutions such as invoice factoring, merchant cash advance, or purchase order finance. An application for any of these financing solutions doesn’t take a lot of time.

How Much Money Do You Need?

If you need at least $250,000 or even $1 million, then a bank may be a more suitable source of financing. In fact, the bank prefers that you borrow larger amounts of money because it earns more from bigger loans. Most banks these days won’t lend money to small businesses who need less than $250,000 or even less than $100,000.

Factors however can accommodate smaller sums. These alternative lenders may be able to lend a million or two, but many of them specialize in lending sums in the thousands, and not in the millions.

What’s Your Credit Score?

If you have a stellar credit score, then a bank may be able to lend you the money you need. Your business should have a good credit standing too. Your credit score is an indication of how likely you’ll be able to pay back the loan.

But factors don’t really care much for your credit score. They care more for the credit score of your customers, since they are the ones who will pay them back not you.

What Kind of Collateral Can You Offer?

In general, your business should have some sort of real estate or expensive equipment to use as collateral. And that may not even be enough for banks. Many small business owners may be required to use their houses and cars for collateral as well. With invoice factoring, on the other hand, your invoices are the “collateral” for the cash advance.