How Factoring Works
Factoring involves three parties: a company who is looking to get cash by selling ther accounts recievables or inventory, the company’s customer who owes the company, and the factor who pays the company instead of the customer and collects payment from the customer. The factor will give the company money for their invoice or inventory upfront at a discount of a small percentage, or there is reverse factoring where the factor finances a company’s supplier instead of the company for a small percentage of interest due at a later date. This allows the supplier to get their money sooner, and the company ordering from the supplier has more time to pay their invoices. Factoring provides an increase to cash flow for a company, which can help their business run smoother and expand quicker.
How Bank Loans Work
Bank loans involve two parties: the bank who provides the loan and the company who needs money and is taking out the loan from the bank. When a business gets a loan from a bank it can be used for a wide variety of funding uses within the company, but the uses for the loan usually need to be specified to the bank. To get approved for a bank loan is often a long processes, and approval from a bank can take months, especially for smaller companies. Repayment of the loan can be structured for different lengths, but always comes with an interest rate, which is usually higher than you would pay for factoring, especially for SME’s (Small and Medium sized Enterprises).
Benefits
Factoring
- Don’t have debt to pay back
- Uncapped funding potential
- Approval within days
- Great for small and medium sized businesses
- Improves cash flow
Bank Loans
- Repayment over time
- Flexibility of usage
- Great for larger companies
Drawbacks
Factoring
- Large corporations can get more competitve interest rates on loans from a bank
- Only short-term financing periods (30 – 150 days)
Bank Loans
- Criteria makes it hard to get a loan for smaller businesses
- Approval can take months
- High interest rates
- Capped funding potential
