When you operate in a B2B (Business to Business) or if you have government contracts, it is very common for a business to invoice on 30, 60 or 90-day terms. This means that there is a gap of potentially one to three months where the business is owed money, and is not on hand to use on other necessities.
This can create cash flow problems for a business in a one-time or an ongoing scenario. Turning to different options in financing can have consequences for the business. Knowing the differences between factoring, lines of credit and loans can help you make the right choice for your business.
When choosing between factoring, lines of credit and loans, keep in mind that the first one is a non-loan option and the other two, lines of credit and business loans, do include a loan. This means with these two choices there is interest and repayment, while with factoring there is no interest and no repayment.
Bank loans are difficult for many businesses, including startups, seasonal businesses or businesses with less than ideal credit scores. In addition to being difficult to be approved for, they are also slow and require years of repayment, including on interest.
Lines of Credit
Most businesses that can’t get a loan won’t qualify for a line of credit. If they are approved, they operate as a fund that is there for your use up to the approved amount. When you draw on the funds in the account, you will pay interest on the amount borrowed until it is repaid. Sometimes there are annual fees on lines of credit as well.
The better option between factoring, lines of credit and loans is factoring. This is not a loan but rather the option to sell accounts receivable to a factor for a small percentage fee. The factor provides up to 80% or more of the face value of the account receivable immediately, then the remaining balance (less their fee for the service) once your customer pays the invoice.
With factoring, there is no repayment and no interest. In addition, the factor manages the accounts purchased, a real win-win situation for any business with short-term cash flow concerns.