Business Cash

Bank Financing versus Invoice Factoring

Comparing Bank Financing to Invoice Factoring

What is the difference between a line of credit from a bank and Invoice Factoring from a Factoring Company? Well, let us first review how a bank would look at you as a potential loan client. A bank will paint a complex picture of you and your company using the “5 C’s of Credit“. What are the Five C’s of Credit? Character, Capacity, Capital, Conditions, and Collateral. Click on the link for an excellent description. If you can meet a bank’s many requirements and most importantly, they can give you enough working capital to function and grow that is the best route to take.

However, it is not easy to meet all the bank’s requirements and even if you do there is a good chance that it will be a dollar amount way below your working capital needs. For instance, if your business is less than two years old (Capacity), your credit score is below 650 (Character), you are not profitable (Capital), they don’t really understand your inventory financing or invoice finance needs (Collateral) a deficiency in any of these areas will preclude you from bank financing. Also, if you are marginal in any of these areas a bank will limit the amount of credit available to you.

What about Invoice Factoring? First, a Factoring Company will weigh heavily on the quality of your Collateral and a little bit of your Character. When it comes to your Collateral (Invoices or Purchase Orders), a factor will look if your client is creditworthy and if you have delivered the goods or services to your client’s satisfaction. Also, your Collateral cannot be encumbered. What does “encumbered” mean? If you have an existing bank loan, or SBA guaranteed loan or a tax lien there is a good chance that there has been a lien placed on your Collateral. However, that does not mean a Factoring Company cannot help you. We can work with a bank or the IRS to come up with an agreement to get you additional fresh working capital. For instance, if you owe back taxes, a portion of the funding we give you can go to a payment plan you have arranged with the IRS.

Let’s talk briefly about Character and how a Factoring Company looks at a potential client. A Factor understands things happen and your credit might be bruised because of healthcare issues, personal real estate loans or a previous business venture. What a factor or any other type of lender cannot overlook is fraud. You cannot have committed any type of fraud against a financial institution.

Need funding help if banks can’t? Call 866-598-4295 or use the fast, safe & secure online-funding application.



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