Factoring Vs A Bank Loan

Companies engage in factoring because they need to correct an interruption to their cash flow. These businesses are often new companies that have not acquired enough clients to generate a steady stream of income. Sometimes more established companies also need to rely on factoring to help them get through difficult circumstances.

This process also known as invoice financing requires a needy company known as the invoice seller to display its unpaid invoices to an invoice finance company which is also known as the factor in this situation. The factor reviews these unpaid invoices and the clients who are expected to pay them as well. Once the factor is sure about the expected repayment of certain invoices it will offer to buy these invoices for a percentage of their real value. The factor profits in this situation by collecting the invoices full value at a later date.

The invoice seller stands to make more money by holding on to its invoices and collecting their full value. However the factor will pay money on the spot and put cash in the hands of the struggling company. This enables the company to use that money for various purposes. They may need to pay employees. Creditors may be expecting prompt payment of interest charges. These companies may also need to spend money of filling orders that will generate more profits and make their customers happy. If they wait on payments for the invoices these payments may come too late for the invoice seller to use. Sometimes a company must choose between factoring and bankruptcy.

Other companies in similar situations will consider trying to get a loan from a bank to tide them over until the invoices are paid. This way they receive the entire amount that they charged for the invoices. However this also entangles then in interest-accruing charges and a possible lengthy repayment plan. Also the loan process can take a long time to unravel. It diverts human resources away from the company’s goal of making money toward the process of filling out paperwork for the bank. In the end the loan may come too late. It may even be refused leaving the company in a worse situation than before.

Invoice financing on the other hand is relatively quick. The invoice seller will know very quickly whether or not a relationship with the factor will be possible or not. The money will be delivered almost instantly. In fact unlike many bankers factors have taken advantage of the revolution in communications technology and streamlined the process for acceptance or denial. In most cases anyway some of the invoices will be acceptable. A factor reviews the invoices in order to determine if any of the clients are unlikely to pay. Invoice financing is not a way for a company to get rid of invoices for clients who do not pay.

Many companies compare the losses taken by selling their invoices at a discount to the interest they would pay on a loan. They also enjoy the convenience of only selling the invoices that they need to sell in order to survive the moment. They are always free to stop factoring their invoices whenever they want.