Entrepreneurs mostly, look for traditional lending options when they are in the need of increased cash flow, out of which applying for business loans is the most common option. But, depending on the volume of business and cash flow requirements, invoice factoring may prove to be quite better that traditional business loans.
Banks as well as other financial institutions generally offer business loans, however, all lies with the same fundamental concept that a certain fixed amount of money is being lent to entrepreneurs for a specific time frame, with the condition that it has to be repaid in specific amounts on regular note. But, with the introduction of invoice factoring, entrepreneurs are now getting the opportunity of giving a cash boost immediately when the business is in need.
Both invoice factoring and loans award funds to entrepreneurs at the time of need of capital, but, the money mostly comes from varied sources. When a person borrows from a loan company or a bank, the awarded capital entirely belongs to them. On the contrary, in case of dealing with an invoice factoring company, the person draws money from a single source, which essentially belongs to him.
The money is mostly levied against the outstanding invoices, which in turn, mean the financier is advancing delivery of the borrowed money that the person owes. Resultantly, bank loans are an ideal option for people who are in requirement of cash. However, the latter one is applicable for entrepreneurs who need the funds on a quick note.
Invoice factoring hosts a promising benefit over the loans in accordance to the required specific collateral period for finalizing the contract between both the parties. Independent loan companies and banks mostly need greater security, since the risk with which they deal with is greater. This, in turn, indicates that business owners who are willing to borrow them are often required to secure the loans against personal or business assets like, machinery, equipment or their homes.
On the other hand, in case of invoice discounting, the collateral is mostly built as per some valid agreements. The money being lent is typically a percentage of value of the existing invoice, which acts as a security. This signifies the fact that in case of invoice factoring, the risk is lower in this case.
Cost of bank loans is the interest, which is charged on a principal amount being borrowed by the business owners. Though rates may vary in between the lenders, most are quite higher rates across term period of the loans.
Invoice factoring, however, has two related costs; the discounting fee and the service fee. One is required for administering the service and the other is usually percentage of base rate. Despite of being associated with these two charges, this particular option serves to be quite cost-effective as compared to the others.
Thus, irrespective of whether the business is small or big, make sure to deal with a renowned invoice factoring company that has earned reputation for catering clients’ requirements skillfully. Compared to the conventional options of financing, this proves to be quite feasible while considering various aspects related to fund management of the business.