Why Small Business Factoring May Be Better Than Bank Loans

For a long time, the rule of thumb was – if your business needs more funding, you go to a bank for a loan. But nowadays if you need a quick infusion of cash, small business factoring may be a more ideal solution for you than applying for a working capital business loan from a bank.

Many small businesses have discovered that factoring suits them better than a bank loan. Here are some ways in which bank loans may not be as good as factoring:

  • Your business may not qualify for a bank loan. Perhaps your company doesn’t have much of a history yet, or perhaps the bank simply thinks your business represents too much of a risk for them. When you actually don’t have the option of getting a bank loan, factoring obviously becomes a much more attractive proposition.

With factoring, getting your funding is much easier. In fact, factoring is not really a loan at all. You get the money from your accounts receivable in advance, so what really concerns your factor is the ability of your customers to pay you what they owe you and on time. If you have reputable customers, you’re very likely to get approved for factoring.

  • Bank loans take a very long time to process. Even if you do get the money you need from the bank (which is obviously not a sure thing), the loan application process is still interminably slow. The bank has to investigate the state of your finances so that they can be absolutely sure that you have the capacity to pay them back. This lengthy process can be very frustrating, especially when you need money right away to meet payroll.

But with factoring, the application process is much shorter. After all, your credit rating doesn’t really matter all that much to them—only the credit rating of your customers. So setting up the factoring line takes only a few days, instead of months and you can have access to money which you can then use for truly time sensitive financial issues, such meeting payroll, buying equipment, and covering rent and utilities.

  • You have to worry about how to pay back the loan. This is a natural concern. You have borrowed a huge sum of money, and you have to pay it back along with interest. You will probably wonder if you’ll be able to pay it all back, which can be especially worrisome when you put up your own home as collateral.

But factoring isn’t a loan. So you don’t have to worry about repaying the money. Your main concern is that your customer pays what they owe you and for the most part that’s not really a concern at all. Keep in mind that the factor will investigate the creditworthiness of your customers. If they are not deemed credit worthy then the invoice will not be accepted.

There’s a whole lot less worrying when you engage in small business factoring. You can rest easy knowing that you’ll get the capital you need right away.