If your B2B business needs additional capital, you can consider a traditional bank loan or alternative financing. With the frequent difficulty of obtaining bank loans or lines of credit, speeding up cash flow through invoice factoring and invoice discounting are gaining popularity as viable financing alternatives.
Before we go further, let’s go over a quick explanation of what invoice factoring is and how it works. Invoice factoring is a form of financing where a business owner sells unpaid customer invoices (or accounts receivable) to a factoring company for fast access to funds. The business owner receives cash for the invoice amount, less a factoring fee, ahead of the payment terms. The business owner’s customer, who is responsible for paying the invoice, instead pays the invoice amount to the factoring company according to the original payment terms. Invoice factoring also goes by the terms accounts receivable factoring or receivable financing.
While the process for getting bank financing can be long and difficult, business loans and lines of credit have a place in a thoughtful financial strategy. It’s no secret that a line of credit is a convenient, low cost source of financing. Our CEO even wrote an article about why you should get a line of credit – if you can qualify.
That point is why invoice factoring (or invoice financing) is better than bank loans for so many small, growing businesses. Oftentimes, our small business clients have told us that they don’t have yet have the financial documentation or annual revenue the bank wants to see, or they can wait the 3-to-6 months it’ll take to get approved. Sometimes, the bank doesn’t want to talk at all.
Receivables financing has become a reliable source of working capital for many small and medium sized businesses because it’s as convenient as a line of credit while providing quick access to cash. But those aren’t the only reasons.
Here are 6 more reasons why many business owners prefer invoice factoring to bank loans when considering their business financing options, and why you might, too.
1. Quick and Convenient
Bank financing options 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 months for the bank to make its decision. Worse yet, after all that time, the loan may not even go through – leaving you at square one to get cash. It’s a stressful situation if you need a source of cash quickly.
In the case of invoice factoring, the approval process is fast (via an online application) and the invoice factoring agreement is simple. As soon as your customer verifies that the invoice is real for the factoring company and confirms that they will redirect payment, you can get a cash advance in as quickly as a few business days, or even 24 hours.
2. Improved Cash Flow
If you can’t qualify for traditional loans or lines of credit, but need a boost to your business finances, invoice factoring provides a predictable source of cash and flexible financing. While many traditional invoice factoring companies required business owners to fund a minimum number or dollar amount of invoices, newer factors allow you to choose which invoices you want to fund whenever you want to fund.
Factoring for cash flow creates greater liquidity, allowing businesses to cover their expenses (like payroll, buying in bulk, or expanding operations) 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.By far one of the best reasons invoice factoring is a better funding option than bank loans is that it doesn’t create debt. Since you’re only leveraging the collection of a future customer payment (resulting in an increased cash balance and a reduced accounts receivable balance), you won’t have the burden of needing to make monthly payments on a loan. Invoice factoring doesn’t weigh on your balance sheet or on your mind, enabling you to focus on your business.
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 go through the application process all over again if you need additional funds. Look for an invoice financing company that can give you unlimited capital if you qualify, making the amount of cash available through invoice factoring 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. When you have a big opportunity that comes you way requiring cash to pay upfront costs, you’ll be able to take it on without worry.
5. More Cost Effective
Although bank financing is typically less expensive, invoice factoring includes a number of services that can reduce your administrative costs, or simply add value for you. Many of the best factoring companies complete credit checks of your customers, determine credit limits for them, and collect receivables. By having these tasks done elsewhere, you have more time back in your day to focus on your business instead of doing admin work like chasing down a late payment or doing invoice processing. (Always make sure any factoring company or factoring services you’re considering doesn’t charge hidden fees or an unnecessary service fee that will drive up your invoice factoring cost.)
6. Drives Growth
One of the top reasons small businesses turn to invoice factoring services is because they are growing – and growing requires cash to pay your current expenses along with expenses for large projects or more customers. Invoice factoring speeds up cash flow so that you can have that cash whenever you have a chance to grow.
Is Invoice Financing the Better Choice For Your Business?
Bank loans may be preferable for businesses with the financials necessary to qualify for bank financing. But for the many businesses that don’t qualify for bank loans, accounts receivable financing is a convenient option.
Invoice factoring is a smart choice for B2B business owners who need capital and are optimistic about their business’ growth potential. By enabling you to turn invoices into cash, this alternative lending practice provides liquidity without adding debt or making you give up any equity in your business.
Ready to get fast, flexible funding?
Get started by creating a free FundThrough account, or connecting your QuickBooks, OpenInvoice, or WorkBench accounting software to start funding an invoice.