Small Business Loans vs. Invoice Factoring: Weighing Your Options

If you are a small business owner seeking financing, there are a number of options to choose from, including small business loans, invoice factoring, and merchant cash advances. Each funding option offers its own pros and cons you should consider before deciding which small business finance choice is best for you.
Weighing Your Financing Options

Small Business Funding from Traditional Banks

Standard-rate business loans are generally best suited for asset-rich businesses with a history of solid growth. The business can put down collateral to secure a loan and agree to pay it back (plus interest) at set intervals over say a 5-year term. Yet if you are a startup small business or a business with little or no assets, securing small business start up loans can prove difficult, especially in a poor economy. Government supported SBA loans were put into place to encourage banks to lend to startups with limited assets, and some businesses have found success going with this option.

However, SBA-guaranteed loans come with their own set of hiccups and setbacks. Notably, the application for a SBA loan is lengthy and cumbersome deterring many would be applicants, especially those who need the cash right away. Though you may get a lower interest rate than standard small business loans, they often require collateral which may come in the form of your house, car, property, etc.

Invoice Factoring and Small Business Funding from Factoring Companies

Another financing option many fail to consider is small business funding from an invoice factoring company. Like all loans, you agree to pay back the loan amount over a set period of time with an agreed-upon interest rate. The key difference is invoice factoring companies are built around expediency and customer service rather than bureaucracy. Most lending decisions are made within 48 hours or less instead of several weeks and often times the interest rate is comparable to traditional lenders. Many businesses simply aren’t aware that they can get reasonable term lending from institutions outside traditional banks.

Invoice factoring or account receivables factoring itself might also be a great option for small businesses; in fact, enterprises without assets makeup the bulk of factoring invoices’ customers. Rather than relying on assets, credit scores, collateral, or tax returns, factoring receivables relies on the credibility of your existing or would-be customers. Using these invoices as collateral, the factoring company “buys” the invoices giving you cash straight away and charging an agreed upon percentage for the process. There are many myths associated with the process of invoice factoring, but many small businesses have found it to be a great option for their situation.

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About the Author:

Robert Bernfeld started in the commercial finance industry in 1974. His early years included positions with Aetna Business Credit and Foothill Group. During the next thirty five years. Mr. Bernfeld established both equipment leasing and accounts receivable factoring companies.He partnered in founding Business Facilitators, Inc. in 1999. Mr Bernfeld graduated from the University of California, Riverside in 1974 and received his Juris Doctorate from Loyola University School of Law in 1977.

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