Factoring is not a loan and there are many differences between getting a bank loan and utilizing factoring.
Banks lend money. Most of the time they require some form of collateral which can be challenging for small or new companies. Additionally, banks are limited (by regulation) to how much money they can advance a business owner (oftentimes between 30% – 50%). Lastly, bank loans show as a debt on the business owners books.
Factoring is not lending. It is the purchase of a receivable at a discount. There are no collateral requirements, no debt and Factors are not limited in the amount of money they can advance (usually up to 90% depending on the payer).
Here’s why factoring isn’t a loan:
When you factor invoices, you are selling an asset (your invoices) rather than borrowing money.
The factor collects the full payment from your customers; you don’t make payments back to the factor on a loan.
The cash advance you receive is your money, just accessed earlier.
The factor assumes the risk and responsibility of collecting payment from your customers.
Factoring vs. a Loan:
Feature | Factoring | Loan |
|---|---|---|
What it is | Selling your unpaid invoices at a discount | Borrowing money that must be paid back |
Repayment | No repayment; the factor collects from your customer | Requires regular payments with interest |
Impact on Balance Sheet | Not a liability, no debt is added | A liability and counts as debt on your balance sheet |
Collateral | Invoices serve as collateral for the transaction | Often requires specific collateral beyond the accounts receivable |
Qualification | Often more lenient, based on customer creditworthiness | More rigorous, with focus on your business’s credit and financials |
Let our team of factoring experts answer any questions you may have about invoice factoring. Contact Us today or better yet, give us a call now and speak with one of our knowledgeable Business Development officers. You’ll be glad you did.