Factoring is commonly used in the transportation industry. It is a convenient and quick way to convert invoices into money without having to wait for the usual payment terms. Once the invoice is issued and the charge delivered, the factoring company proceeds to deliver the payment of the invoice to the customer in less than 24 hours.
Factoring versus Bank Loans
Factoring has the benefit of fast and effective account processing. Banks have a tendency to delay procedures and countless requirements that delay the application process. In addition to being faster and having less paperwork than applying for a bank loan, there are three main differences between financing through factoring and financing through a bank loan:
Obtaining factoring depends on the credit rating of your customers
When applying for a bank loan, the bank will make its decision considering your creditworthiness and that of your business. To obtain factoring, the decision is based solely on the creditworthiness of the customers that invoices. For this reason, factoring is especially beneficial for businesses that have already exceeded their credit limit and for new businesses that have not yet established a credit history.
Factoring takes a different approach to what it regards as an acceptable guarantee
When applying for a business loan, the bank will often ask for a guarantee such as a building or equipment. With factoring, the invoice sent to your client (their accounts receivable) becomes your guarantee.
Factoring does not force you to make loan payments
Most bank loans require regular payments over a specific period of time, for example monthly or biweekly. With factoring you receive up to one hundred percent of your invoice amount within 24 hours after sending the invoice. Then the factoring company expects your client to pay the bill (usually between 30 and 60 days). You do not make any payment since your client sends the payment directly to the factoring company.
Factoring offers you a limited credit based on your invoices
While the bank limited your credit based on your assets. Among the common reasons why a company may require factoring we have selected the following:
- high indebtedness or recent operating losses
- being a new company which means not having a credit history
- be a high growth company that grows faster than your cash flow
Factoring could be the right solution for your business. Learn more about factoring and how it could help your company to meet your cash flow needs.
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