Invoice Factoring vs. Bank Loans

Invoice Factoring vs. Bank Loans

As businesses expand –and hopefully they will– there is often a great need for resources to expand in a certain area. Additional resources may also be needed to cover a payroll, finance a marketing strategy or address the plethora of other expenses a growing business will face.

A company may have the financial stability to obtain an increased line of credit or take out a loan from the bank. For some situations, a tradition loan option is just a bad idea. Banks offer little support for additional borrowing needs and can sometimes be more of a harm than a help to fledgling companies.

Sometimes situations call for less than traditional means of procuring reliable financing. One such financing alternative is called “Invoice Factoring”. Invoice factoring is a means for companies to gain access to a stalled potential, stabilize the cash flow and beat back the bill collectors.

This has also been called “accounts receivable factoring”. What this process involves is looking at invoices as collateral, which can be sold out to factoring companies for financial advances.

Companies that work with invoices to factor have the considerable possibility here. Here is a closer look at some of the specifics involved with Invoice Factoring.

Interest Rates or Factoring Fees

business-loanWhen looking at the initial numbers involved with invoice factoring it may seem that the costs of factoring are even higher than yearly interests that will be paid on bank loans. This is an illusion caused by not viewing the fee about the year’s invoice value; but when you lay out all the numbers alongside things become clearer.

Here’s how it works: Imagine the company in question is producing $100,000 in invoices each month and paying a fee of 2% on the value of these Invoices, they will be paying $2,000 a month or $24,000 a year. This sounds like a lot –and it is– until you realize they will be receiving financial advances amounting to $1,176,000 for the year’s invoices.

$100,000 of invoices a month X 12-months is $1,200,000 of incoming cash flow a year. Then, we must subtract the fees, which were $24,000 a year, and you are left with $1,176,000.

Let’s look at that alongside the deal the same company will get from your average bank loan and a 12% APR. For a $100,000 bank loan you will be asked to pay $1,000 a month just on interest; that’s $12,000 a year –and you will still have to pay off the entire $100,000 which is the loan principal.

Factoring is a much better option because it will provide you with a usable cash flow system that can be used to cover your companies needs for expansion. These resources can be used when covering important payment deadlines such as payrolls or even stabilizing debt payments without incurring future interest rates that dig your company in deeper.

Efficiency of Factoring

Factoring is the financing method that generates no-hassle funds for the company and there are other benefits from this unconventional form of procuring financial aid.

Another benefit of factoring and this form of “debt-free cash” is that the funds you will be working with are unrestricted. Unlike looking for lines of credit or other means of financial assistance for your business, which often come with strict stipulations on what areas of your business this may or may not be used for, factoring provides you with resources that can be used in whichever capacity you deem most advantageous to your company’s interests.

Forthcoming Assistance

Another advantage of this form of financial assistance is the speed at which these funds can be available to address your needs. When factoring your assistance can be ready for work in as little as 24 hours.

All that is necessary is to establish a connection with a factoring company that will be working with you to get you out of this tight spot. We are able to provide links to lenders providing Home loans in Brisbane that can help you.

Finally, you will relieve much stress on your accounting division by not subjecting the books to a thorough scrutiny and in-depth investigation into your company’s spending habits. Factoring is less concerned with your financial situation as it is with making sure your customer can make their payments on time. Facebook Link

In conclusion, invoice factoring can provide companies with a smart financing option that can provide much-needed assistance in time of financial trouble.

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