Our Quick Comparison
If you are one of thousands of businesses that are looking to obtain cash in order to cover the costs of your daily business expenses or operations, you have a number of options to choose from. Two popular ones are working capital financing and account receivable factoring, and each has its own advantages and disadvantages. Here’s a quick breakdown:
Getting a Working Capital Loan: What to Expect
According to Entrepreneur.com, working capital funding, generally speaking, works the same as a term business loan except the reason for the loan is more clearly defined. That is, if you get a term business loan from a standard bank, you might state that you are using that money to expand your business, enter new markets, open new locations, or purchase new equipment. In other words, you are using the loan for something new or above and beyond what you are currently doing.
However, if you are looking to get the money to cover the costs of what you are already doing, such as running your business operations, this is viewed differently by traditional banks. Then they might offer you business working capital loans for this situation, and will generally require you to provide detailed information as to the purpose of the loan, what you will use it for, why you need it, etc.
So how is Invoice Factoring Different?
Though they are sometimes confused with each other, factoring receivables and working capital funding are not the same thing. Factoring accounts receivables is a financial transaction that involves selling your current, existing invoices to a third-party company in order to get the cash you need right away (usually less than 48 hours). The factoring company, like Business Factors, Inc., which will charge anywhere between a 2-8% processing fee, will then collect on those invoices when they come in within the agreed-upon 30-day window and ultimately everyone gets paid. Unlike business working capital loans, there’s no lengthy credit check to process or other extensive paperwork to complete. It can be a fairly seamless process for many businesses in need of quick cash to cover costs.
Get Working Capital Loans from Invoice Factoring Companies
The invoice factoring company generally does not determine suitability of the transaction based on whether you need the money to cover day to day expenses or you need it to expand into a new market. This is a key difference between the two financing options. Some companies don’t want the banks running interference with their business or making such judgments so they like the fast, hassle-free format factoring services provides. In addition, it is worth mentioning that some invoice factoring companies offer working capital loans so this may be the best of both worlds for some businesses.