Invoice Factoring Loan

Michelle Adams

View Posts

A business factoring loan, also commonly referred to as ‘factoring’, is a unique type of financing that gives a business working capital in exchange for certain accounts receivable. This means that a business effectively sells certain invoices to a lender in exchange for upfront working capital. Lenders that issue business factoring loans are often referred to as ‘factors’. The idea is that it allows your business to receive upfront capital in exchange for sales it has already made. Many industries suffer from long business cycles which mean invoices may take considerable time to be paid — business factoring loans help alleviate the stress of a shortage in cash flow.

How is Factoring Different?

A business factoring loan is not a traditional small business loan. The factor is essentially purchasing the rights to a specific invoice, minus a predetermined discount. The factor will typically pay around 75% of the invoice to your company upfront, with an additional amount paid after the invoice is collected. On the other hand, traditional business loans lend you money on the condition that it is paid back with interest over a set period of time. Because of the associated risk for the lending company, a business factoring loan can end up costing a company more than a traditional loan with a low-interest rate.

What’s the Process?

When factors determine to purchase an accounts receivable from your business they will be more concerned with your customer’s financial information than yours. This is because they are essentially taking on the responsibility of collecting the invoice. For this reason, the factor will want to analyze the financial details of your clients before making any decisions to purchase their invoices. Most factoring companies can offer you capital within a day of applying, this is especially beneficial considering that some of your clients may take months to pay their invoices in total. One benefit of factoring is that due to the fact it is not a loan, you technically don’t take on any debt for the capital received.

Is selling accounts receivable a good idea?

Many businesses wonder whether or not selling an accounts receivable is actually a good idea. They worry that they will have to use the funds from the sale to repay the loan on short notice. However, the good news is that there is a period of time within which the loan will have to be paid back. Since it isn’t’ immediate, a business can even turn a profit from the monies loaned to them within the time period of repayment. This makes the actual repayment process much simpler and easier. In addition, the financing provides the business with the funds it needs to pay for any company expenses that might arise before the invoice can be paid off.

Advantages of Invoice Factoring

There are many advantages to consider when it comes to invoice factoring. A business always has a major decision to make when it comes to borrowing funds or obtaining financing for any venture. By exploring the benefits of invoice factoring, the company can get a better idea as to whether or not this is the best option for their needs and goals.

Invoice Factoring Loan

Some of The Benefits of Factoring Include:

Easier to obtain – Factoring is often times much easier to obtain than traditional financing. This is due to the fact that the business is selling a company asset vs. actually obtaining a loan. For this reason, the most critical component of the process is to have invoices in the account receivables department that are from commercial clients who are creditworthy. For this reason, invoice factoring is an option that small businesses without access to a long credit history can more readily access. As a general guideline, businesses that utilize the factoring method to obtain funding typically have up to three million dollars’ worth of monthly revenue.

Immediate access to cash – An additional benefit of factoring is that you have immediate access to cash for any business purpose you might have. From purchasing inventory to buying supplies and equipment, there is no need for business operations to halt as you wait for an unpaid invoice. Instead, you can enjoy immediate cash with the ability to use it as needed any way your business sees fit.

No associated debt – Since invoice factoring is not technically a loan, there is no debt associated with the transaction. Since it doesn’t add an additional amount to the liabilities on the balance sheet, the business owner can have complete peace of mind. In addition, there are no monthly payments to contend with either. This ensures a positive cash flow and increased overall profits for your business.

Flexible Terms – Since invoice factoring doesn’t come along with any long-term contracts, it can be a great option when it comes to finding funding for your enterprise. Instead of dealing with loan minimums and maximums, your business can enjoy flexibility in how often you use factoring for financing. You can also pick and choose when to do the factoring process as well as which particular invoice you would like to use. Factoring is a financing option that is intended to grow with your enterprise. In this way, as the sales within your business begin to increase, so does the company’s ability to obtain more funding.

Strong Credit Not A Factor – One of the great things about using factoring as a funding source for a small business still building credit is that great credit is not a factor. Neither is there a need for concern over how many years a business has been operational nor is it necessary to have strong financials. These points makes factoring an ideal option for businesses still working on establishing a strong credit rating.

Affordable Fees – An added benefit of using factoring as a funding source to obtain immediate access to cash is that the fees associated with it are very manageable. In previous years, the cost of factoring used to be much higher than it is now. However, the cost of factoring has gone down significantly and now advances are available up to 95% of the invoice amount. The related fees are usually around 1.5%.

Increased Business Profits -There are many different companies that opt to use factoring in order to spur enterprise growth. This allows the opportunity to increase overall business profitability in a number of different ways. Some of the ways they have found to increase profit include through negotiating bulk discounts and being able to make early payment discounts. Additional options for improving business profits by using factoring include increasing the inventory on large orders as well as increasing the amount of staff and overhead needed to fund company-wide expansion. Factoring can allow a business to save or make a significant profit without being disadvantaged by factoring costs.

The cost of factoring invoices has come way down over the years with advances available up to 95% and fees as low as 1.5%. The fees vary by industry, volume and number of invoices, advance rates, customer creditworthiness, and how long it takes customers to pay. To find out exactly what programs are available for your business please use our invoice factoring application.

Business Factoring Loan

Are There Other Options?

There are many options available to small businesses seeking additional working capital. But factoring is often considered a short-term solution for what may be a long-term problem. Forfeiting part of your revenue is not an advisable long-term strategy. You may want to consider one of the other various business loans available to you as a small business owner. We offer lines of credit that offer our clients ongoing access to working capital that can help alleviate the stress of overdue invoices. In addition, you don’t have to reapply for access to cash; a line of credit can continually be drawn out of as long as you don’t exceed the limit. Lines of credit allow you an increased amount of flexibility that many other types of financing don’t offer — including business factoring loans. Don’t wait for an invoice to be late or an unexpected event to occur, apply for a line of credit through our online portal today!

How Does A Business Line of Credit Work?

Many businesses searching for creative funding source might have heard about business lines of credit. For enterprise owners who are looking for immediate access to a funding source for their businesses, a business line of credit could offer the perfect solution. A business line of credit acts like a loan and a credit card all in one. It is a revolving source of funding that is issued to a business by the bank or by an independent lender. There is a set limit placed on the line of credit which can extend up to $150,000 and more. There is no interest accruing until after the business line of credit has been tapped into for cash. Once the credit limit has been used up, the business owner must repay the loan before new funding will be extended. The line of credit is usually contracted for one to two years and then it will have to be renewed again following that time.

Why Choose a Business Line of Credit?

Although factoring is a great option for many businesses, some businesses don’t like the idea of selling invoices. They don’t want their clients to have to wonder about the stability of their business when another company collects from them instead of the original business. For this reason, a business line of credit may be a better-suited option. There are several reasons to consider opening up a business line of credit instead of using invoice factoring funding to obtain immediate cash.

Lower interest rates

A business line of credit usually has lower interest rates than many other types of loans especially term loans. If a business is seeking the most affordable financing possible, then a business line of credit offers an ideal solution. Lower interest rates make this type of funding source very appealing for most businesses and it also ensures that making monthly payments is not too difficult.

Continuously accessible funding source

A business line of credit is a funding source that’s never going to disappear overnight. Since it acts like a credit card, the funds are there until used by the enterprise owner. This type of security is unmatched by other short-term loans such as invoice factoring. When you need a solid line of accessible funding for your business needs, a business line of credit can be the ideal option.

Great credit isn’t required

Similarly to the factoring invoice funding method, great credit is not required when it comes to taking out a business line of credit. This makes it easier for companies such as startups to get the funding they need without being passed over by banks and stricter lenders.

With so many advantages to obtaining a business line of credit, it makes sense to consider this funding source for meeting everyday business expenses.

About Business Line of Credit Hub

Business Line of Credit Hub is the premier provider of access to business lenders nationwide. We operate with honesty and integrity ensuring the best experience for our clients. Our goal is to make it as simple as possible to get the funding your business needs to consistently thrive and expand. From purchasing new inventory to keeping up with payroll, we know it takes a lot to run a business and we are here to make it as easy as possible to get the funding you need. Browse our website to read additional articles with helpful information about the different types of business loans available to you. At Business Line of Credit Hub, we are committed to providing the highest quality service to help you meet both your short term and long term financial goals. When you’re ready, fill out our intake form and begin taking the right steps towards expansion, growth, and profitability today!