How is Factoring Different?
When you need money for your business, where do you go?
Smart and savvy business owners search online for information and funding sources before running down to the closest bank and applying for a loan. Search online for "small business loan" or "business financing" and you'll find a slew of banks, government agencies, consultants, middle-men and fly-by-night quick cash operations.
A term that doesn't usually come up in the business loan search is "invoice factoring." Not many business owners have ever heard of factoring, even though it's a legitimate and long-standing finance tool. If you need a quick rundown of the factoring process, give this article a quick read.
Factoring companies gained more recognition and loyalty during the recession when banks put a stop on the free-for-all lending practices of the past decade. Many small and medium-sized businesses rode out the recession, even managed to grow, thanks to factoring. Now that traditional credit financing is beginning its come-back, the savvy business owner should consider all options, including factoring.
Here's a quick look at how traditional bank loans compare to invoice factoring.
Time in business:
Bank loans typically require a minimum of 3-5 years in business while factoring is commonly used by both start-ups and established companies.
Required documentation:
Applying for a bank loan requires a business plan, three years of financial history, three years of business tax returns and personal tax returns along with current personal financial statements. A factoring company will want to see your balance sheet and P/L report, last year's tax return and a current A/R aging report.
Ratios examined:
A bank will review your liquidity, leverage, inventory, turnover, receivables turnover, gross profit margins and return on sales. A factoring company does not review typically review ratios.
Credit ratings:
Banks won't give many loans to businesses with less than a stellar credit ratings. Factoring companies look at the credit rating of your customers and doesn't pay much attention to yours.
Use of funds:
Banks can require that the funds they provide are allocated for certain uses (inventory, equipment, etc.) Cash from a factoring company can be used however is best for your business; there are no limitations.
Approval time:
Approval for a bank loan can take months while getting approved for factoring can take a couple of days.
Repayment of funds:
Banks require a monthly payment for a set term to repay the borrowed funds. Factoring is a process that does not incur any debt for your business, meaning no payments- ever.
In short, factoring is a finance tool that grows along with your business and provides debt-free cash when you need it. Business loans certainly have their place, but wouldn't you rather finance your business without going into debt if at all possible?
