Information Technology Invoice Factoring

Each of these different funding options have pros and cons to consider, so that you can make the best decision for your company.

Loans

Costs for a new or growing IT business can be significant. You may need to purchase equipment and inventory, pay employees, and keep up with rent, taxes, and marketing. You may consider taking out a business loan. A business loan provides businesses with a lump-sum payment to help fund business activities. It is a form of debt, and will require you to repay the amount of the loan (plus interest) over an agreed upon period of time.

Pros

• Low interest rates when compared to many other types of funding.

• Interest can be deductible on your taxes.

• Loan sizes vary to best meet your needs.

• On-time repayments can help improve your credit rating.

Cons

• Many small, growing businesses don’t qualify for business loans. On top of that, they often need cash faster than the process would allow. 

• Most lenders have strict guidelines for loans, and a lengthy review process.

• You’ll need to have a good credit rating to get low interest rates. Anything else and you may not qualify, and if you do you’ll likely pay a higher interest rate.

• Rates can fluctuate depending on the market. When you borrow can influence how much interest you’ll pay.

• You have to pay back the loan, reducing your cash flow – the problem you’re trying to solve.

Lines of Credit

A business line of credit (LOC) is a lot like a credit card. You can borrow/withdraw money up to a certain maximum amount determined by your financial institution. You can use the funds to cover day-to-day expenses and pay back your debt. It’s ready for you to draw on it again when needed.

Pros

• You can borrow only what you need as long as you don’t exceed your limit.

• Making on-time payments can help improve your credit score.

• Lines of credit can have lower interest rates than other forms of business funding.

Cons

• As with business loans, oftentimes banks won’t give small, growing businesses a line of credit. They often need cash faster than the process would allow, anyway.

• There will be limits on the maximum amount you can borrow, which might not always be enough to meet your needs.

• Although you pay-as-you-go, if you miss payments, are late, or move outside the terms of your agreement, you might face high penalties and fees.

• It’s easy to misuse a line of credit (just like it’s easy to misuse a credit card).

• If your business fails, you are still responsible for any payments and debt incurred from using your business line of credit.

• It’s difficult to qualify: You need to have been in business at least two years, and will need to provide bank account information, financial statements, tax returns, and more in order to qualify.

Business Credit Cards

Like all forms of funding, business credit cards must be used wisely or things can go sideways very quickly. Business credit cards work much the same as a personal credit card, however, it is tied to your business and meant for business-related purchases.

Pros

• It’s easier to qualify for a business credit card than for a line of credit or business loan.

• You have quick access to the cash you need, when you need it.

• Many business credit cards have reward programs or incentives, like cash back or airline miles.

• A business credit card can help build credit, which is helpful if you ever need to apply for a bank loan.

Cons

• You may need to provide a personal guarantee to qualify.

• High interest, costly annual fees, and late charges can add up, especially if funding a large expense.

• Many business credit cards do not offer purchase protection.

• Business credit cards come with security risks like fraudulent charges from unauthorized use and stolen credit card numbers.

• You risk overspending.

Receivables Factoring

Receivables factoring for information technology companies involves selling your outstanding invoices to a factoring company, who then advances you the payment (minus a small fee). The factor works with your customer to collect payment for the invoice according to the original net terms. 

Pros

• You have access to quick capital by getting paid in days.

• You can get an invoice funded any time, even on short notice.

• Does not require your business to have a long credit history, making it ideal for start-ups and fast-growing firms.

• Relies on the creditworthiness of your customers, not your business.

• Easier to qualify for than most other forms of business funding.

• Funding can increase with the value of your invoices.

• No dilution; keep control of your company

• No debt, since your customer repays the tech factoring company

Cons

• Information technology factoring invoices need to be verified. You might be concerned about a factoring company contacting your customer, but with FundThrough you don’t have to worry, as we understand the importance of treating your customers like our own.

• Can be complicated to account for in bookkeeping. Some people think that accounting for technology factoring transactions in their bookkeeping software is challenging, but our step-by-step guide makes it easy.