Traditional Bank Loans vs. Invoice Factoring

Even if you have heard of invoice factoring, you may not know the difference between that and a traditional bank loan. Although they share some similarities, there are also some differences. In this article, we provide the information you need to help you decide which is best for you and your business.
Traditional Bank Loans – After all of the required paperwork and lengthy approval process, the bank gets to decide whether or not to give you a loan and how much they will loan you. For startup companies without solid credit history, the chances of being approved can be pretty slim. Banks also have what is called a loan covenant, which means that the business must also fulfill certain financial performance requirements. Once you have passed all of those hurdles and get a loan from the bank they can come with restrictions such as how the loan can be used. These restrictions could leave you with the money you need but not provide the freedom to use the money the way you need.
Invoice Factoring – Also known as receivables factoring, allows business owners to convert their invoices into immediate cash to cover costs without taking on additional debt. Unlike traditional bank loans, the process is simple, fast and the cash can be used at your discretion. The factoring company gives you immediate cash and handles the collections on the original invoices. Another benefit is that the amount of money that you get form your invoices is determined by the credit worthiness of your customers and not your credit history. Even better yet, is the fact that invoice factoring doesn’t require any upfront fees and there is no long-term commitment.

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