Accounts Receivable Financing Versus Bank Loans: Which is Right for Your Company?

Finding the right funding for your business can mean different things at different times. For example, if you are in the need of quick cash to take advantage of a timely offer or start a new project, then accounts receivable financing, or factoring, may be better than taking out a business loan. To find the right financing for your current needs, it is important to know some definitions, comparisons and tips about factoring and bank loans.

Some Definitions

Accounts receivable financing is the process of taking your invoices, where your customers have between 30-90 days to pay, and selling them to a factoring company. This company will then collect on the invoices for no extra fees towards your customers and give you the value of those invoices minus a small fee. This fee is usually less than five percent but may be higher in some industries.

Bank loans are a traditional way of financing business and private ventures which involves a secured line of credit. To get this type of loan, you will need to have a good credit score and be considered low risk for defaulting by the underwriters. It can take anywhere between weeks and months to secure a bank loan and you will need to pay it back according to the terms of that contract.

Some Comparisons

Accounts receivable financing is not a loan. This means that you will not have to make any payments or add another bill to your books. The factoring company gets paid by taking a small percentage of your invoices before giving you the balance, meaning that they have already been paid and don’t make money off of interest. This also means that factoring does not depend on the state of your business credit and does not reflect on your credit score, good or bad.

Some Tips

The more research you can put into both traditional and alternative forms of business financing, the better plan you can make for your overall financial business plan. This means comparing many different types of financing as well as the various terms you can expect from each of those types. For instance, there are many factoring companies you can choose from for your accounts receivables and comparing those terms can get you the best deal.

Accounts receivable financing can be a good alternative to bank loans for many companies. The key to finding the right financing options for your needs is to do some research and comparisons to find some tips. The more you know about the types of financing and your needs, the easier it will be to get the right financial help for your company.


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