The process of factoring first started back in the 1600’s by large European banks, and now is a $3 Trillion global industry. It has since expanded throughout the world and has branched off into its own area apart from other financial services. Most business owners don’t even understand what factoring is, or how it can benefit them by providing advanced funding and working capital. They brush it off as a last-resort effort of a doomed business. On the contrary, factoring and asset-based lending are powerful tools used to help businesses expand, grow and succeed in their chosen markets as well as new niches.
The differences between the two
When businesses need additional funds, many of them turn to traditional banks for a loan or line of credit. But did you know this can end up hurting your business more than it can help it? Traditional banks provide funds based on credit ratings, and are tied to numerous state and federal guidelines when it comes to providing business funds. Factoring firms, on the other hand, are less constrained and can focus more on the quality of a business’s collateral instead of its credit rating. Another benefit to factoring is that it is not a loan. It’s an advance on funds based on your inventory collateral or commercial Accounts Receivable invoices. When a business sells their AR to a factoring firm, they are changing ownership of those accounts. As such, the business will not be subject to repaying a loan as they would with a traditional bank.
Traditional bank loans
Banks in general are looking for ways to make a profit on loans they provide. So while your business may be able to obtain a bank loan, you will also be subjected to a variety of fees, additional costs, early payment fees, late payment fees and more. In addition, most banks will not lend to businesses that have a credit score of less than 740 which means small and mid-sized businesses are out of luck. Let’s say you are above 740 and have no problems with all of their additional fees, what happens if you miss a payment or fall a little behind? Can you catch up on the payments and late fees? If not, are you prepared for the damages it can cause to your credit rating and overall debt? Traditional bank loans are a viable option for many businesses, but for those that don’t qualify at a bank, factoring may be the best way to go.
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