With a loan from a bank, you’ll need to apply first and go through an approval process. Even if you’re approved, you still only have access to a finite amount of capital that you’ll still have to pay back at some point (a loan is a loan, after all). Even if you do get approved for the loan, you might not get approved for as much as you actually need, so it’s not quite a stopgap measure or a solution for your cash-flow problems.
Once you have the money from your loan, you can use it, but with interest compounded on top of the principal, you’re paying back much more than you took out. Let’s say you took out a $100,000 loan. Depending on the interest rate, you might end up paying back well over $200,000.
With factoring, you don’t need to worry about a 10-year payback and monthly payments like a term loan. The money the factor advances you is from your own invoices, and each advance is paid off when your Customer pays you 30 – 45 days later. Invoice factoring grows along with your Company growth and is a short-term financing solution to provide your Company the working capital it needs today.
Credit cards are typically “for emergencies only” resources, even outside of the business world. With notoriously high APRs and extra hidden fees at every turn, credit cards can be one of the worst options for business owners who need cash right away for their businesses. And you still need to be approved before you can start using a credit card in the first place!
Additionally, defaulting on a credit card or a loan can have consequences for your credit score. No matter how many points you can rack up with purchases, or how many benefits there are attached to your card, you still need to pay off that credit card. With factoring, there is a small discount fee associated with each factored invoice but once the invoice is paid by your Customer, the transaction is closed and you’re done. No APR, no monthly fees, and no recurring interest payments.
Invoice factoring and invoice financing are two terms that sound similar but are actually quite different. With factoring, you don’t need any kind of collateral and the money you receive from the advance isn’t a loan you need to pay back.
With invoice financing, the invoice itself acts as collateral and you get a cash advance on it. However, you’re still responsible for both collecting the invoice and paying back the advance. In a way, invoice financing isn’t too different from a conventional loan. If you don’t want to deal with interest or collateral, or if you’ve been unsuccessful in collecting from your customers, invoice factoring would be a better option than using invoice financing.
Recently there’s been a dramatic increase in small businesses employing Merchant Cash Advances as a source for working capital funding. Merchant Cash Advances, or MCAs for short, have become attractive due to their quick application process and fast access to capital, with the approval not being so heavily dependent on your credit score. As a result, more and more businesses, who may have previously used a credit card or their own funds for working capital, are turning to MCA lenders.
The problem with MCA loans is that many companies make two critical mistakes: 1) they don’t do the math as to the size and frequency of the cash withdrawals by the lenders, and 2) they often find themselves going to the well again, taking out a second, third, fourth, or more MCA loans — a term referred to as “stacking.” Stacking results in a cascade of daily or weekly variable withdrawals from your small business bank account, resulting in you losing complete control over the Cash Flow you were trying to fix when you took out the advance in the first place. Factoring doesn’t involve withdrawing money from your small business bank account, but rather, depositing money quickly into your account from the fruits of your labor as Advances made against your invoices for products or services your business has provided Customers. With factoring, there are no tricks, no unexpected withdrawals — just plain predictability and consistent working capital.