Sometimes you may be forced to seek financial funding during a business turmoil. You can support your operations during a severe economic crisis in several ways. This includes invoice factoring, bank loans, or money from loved ones. Each method ensures you have enough cash to finance your business operations.
This article discusses two funding options: invoice factoring and bank loans. It also outlines the benefits and challenges of each, helping you choose the better option.
What Is Invoice Factoring? 
This financing option has been around for many years. But its popularity has grown notably in today’s era. In this option, your business sells its pending invoices to a service provider (a factor). The factor will immediately pay a percentage of the invoiced money (usually 80%–90%). Then, it reimburses the rest (less the nominal fee) once it has collected the payment directly from your customers.
A business may consider this option if your customers take time to pay, and this affects your cash flow.
What Are The Pros Of Invoice Factoring?
The following are ways you may benefit from invoice factoring:
1. Improved Cash Flow
When you sell your invoices, you’ll have enough capital instead of waiting for the customers to pay. Thus, you’ll have money to bridge short-term expenses or take advantage of seasonal business opportunities. This increases your survival rate and customer base, enhancing sales and revenue.
2. Enhanced Customer Relationship
Chasing and collecting bills from customers consumes time. Also, it may strain the customer experience, which can harm the business relationship. However, allowing a reputable factor to manage the collections of your outstanding invoices may save you from this. Additionally, you can concentrate on core activities such as customer relationships.
3. Quick And Convenient
You need to access money quickly in a financial emergency. Once you have sold your invoice, the factor will verify its validity and wire you the money within 24–48 hours. However, taking your time to go through their terms is vital before agreeing to them. This guarantees you’re working with a reputable company and saves you from losing money in the long run.
What Are The Cons Of Invoice Factoring
Despite its numerous benefits, this funding option also has downsides, including:
1. You Lack Control
When you sell your invoices to a factor, you give them control over your accounts. Thus, you can’t dictate their collection method to your customers. Sometimes, the company may use aggressive strategies to recover money, damaging customer relationships.
However, you can avoid this by working with a reputable company. So, you should review the testimonials and refrain from working with a factor with negative ratings.
2. It Solves Only One Problem
You can use invoice factoring to address cash flow issues due to slow-paying customers. You may have to consider other funding options to handle extreme financial situations.
What Are Bank Loans?
Most likely, you have an idea of how bank loans work. In a traditional setup, your business will borrow money from a financial institution and deposit collateral to secure the loan. Then, you will pay the money plus interest over a given time.
What Are The Advantages of Bank Loans?
The following are the advantages of borrowing money from a financial institution:
1. You Maintain Full Control
A bank loan makes it easier to access funds without any control over your company. Thus, you’ll make decisions based on your business objectives and goals. However, when you sell your invoices, the factor will control the collection methods and accounts receivable.
2. You Get Access To More Funding
If you need money to finance long-term investments, invoice factoring may be ineffective in raising the required capital solely. So, you may consider bank loans to access a more significant money source. The amount you can secure depends on your assets and guarantee. Therefore, borrowing a considerable amount to fund your business expansions will be easier if you have more assets.
What Are The Downsides Of Bank Loans?
The following are the disadvantages of getting a bank loan:
1. Longer Application Processes
When you apply for a bank loan, there are low chances you’ll get the money within a day. The lending company will have to evaluate the value of your assets to determine creditworthiness. This process takes time, so accessing the needed cash will take longer.
2. Interests
The interest means you’ll have to repay more in the long run. But the rate will vary, depending on your credit score. Thus, it’s crucial to identify ways to improve your score. Also, it’s important to manage your loan payment to avoid sinking into a debt cycle.
Which Is Better For Your Business?
The above gives a clear outline of what you need to know about invoice factoring and bank loan. Consider factors such as credit score that may help you choose the right funding. For instance, invoice factoring may be suitable if you have a poor credit score, as it’ll save you from costly interest.
Bottom Line
During a crisis, you may be forced to seek financial aid. Invoice factoring has become a popular financing option over the years. Still, some companies may prefer to get funding by applying for a bank loan. The choice you make depends on factors such as credit score, the amount of money you need, and more. It’s advisable to communicate with your financial advisor. They’ll recommend the right option for your business operations.
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