Invoice Factoring

6 Reasons why Invoice Financing is Better than Bank Loans

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If your Canadian business needs additional capital, you can consider a traditional bank loan or alternative financing. With the frequent difficulty of obtaining bank loans, invoice factoring and invoice discounting are gaining a lot of popularity as viable financing alternatives.

Receivables financing has become a reliable source of working capital for many Canadian small and medium sized businesses and it’s easy for you to join them. But before you get going, how do you know this alternative financing is better?

Here are 6 reasons why many business owners prefer invoice financing to bank loans, and why you might, too.

1. Quick and Convenient

Banks have very strict requirements and require tons of paperwork, often making the loan approval process a complex and lengthy one. It can take up to several weeks (or even months) for the bank to make its decision. Worse yet, after all that time, the loan may not even go through.

In the case of invoice financing, the funds are released almost immediately, providing a quick increase in cash flow. If you choose a top lender, it takes less than 24 hours to get the capital you need.

2. Improved Cash Flow

Compared to bank loans, invoice financing provides a predictable source of cash. Factoring for cash flow creates greater liquidity, allow businesses to cover their expenses in a timely manner and use the additional working capital to take advantage of more opportunities to help the business grow and profit. And all without creating debt, as we’ll discuss next.

By far one of the best reasons invoice financing is better than bank loans is that no debt is created. Since you’re only leveraging the collection of future invoices (resulting in an increased cash balance and a reduced accounts receivable balance), you won’t have the burden of needing to repay loans.

4. No Caps or Limitations

Banks loans have a maximum amount that can be borrowed. Once you’ve reached the limit you’ve been approved for, you’ll have to re-apply if you need additional funds. In contrast, the amount of cash available through invoice financing is directly related to your sales volume. The more sales you close, the more invoices you’ll be able to factor. As your business and sales volume grows, you’ll have access to even more cash through your receivables.

5. More Cost Effective

Although bank financing is typically less expensive, invoice discounting and factoring (what is factoring) include a number of services that can reduce your administrative costs. Fees often include services such as investigating the credit health of your customers, determining credit limits for them, and collecting receivables. By having these tasks done for you, operating efficiencies are created, saving you money over time.

There’s also no commitment with working capital financing, allowing businesses to finance on an as-needed basis. From this perspective, when you factor in loan rates, terms, and conditions, traditional bank loans can potentially end up costing much more in the long run.

6. Less Risk Involved

Banks often require businesses to use not only the business’ assets as collateral, but personal assets as well. With invoice financing there are no personal guarantees, so you don’t have to risk your personal assets to finance your business.

The Costs of Invoice Financing

While invoice financing may prove perfect for your business, we recommend familiarizing yourself with its costs so you’re fully prepared. Here are a few things to consider:

  • For every invoice factored, you’ll lose some profit.
  • The lack of book debts available as security may prevent you from obtaining other types of funding.
  • Some become reliant on the improved cash flow, making it hard to stop utilizing this funding source.
  • Invoice financing or factoring may carry higher fees than a bank loan.

Is Invoice Financing the Better Choice For Your Business?

Bank loans may be preferable for businesses with the cash flow and collateral necessary to qualify for bank financing. But for the many businesses that don’t qualify for bank loans, accounts receivable financing is a great option and the benefits received far outweigh any of the disadvantages.

Invoice financing is a smart choice for Canadian business owners who need capital and are optimistic about their business’ growth potential. This alternative lending practice provides liquidity without adding debt or making you give up any equity in your business.

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