What’s Better: Factoring or a Bank Loan
With all the choices out there for fast business financing, you might be asking which is better, factoring or a bank loan. You should begin by learning all the facts about each choice to determine which is best for your small business.
In running your small business, you make a hundred choices each day. You may ask yourself if you should hire this person or that one, go with a less expensive supplier or stick with the old one, and on and on. In the end, after weighing all the pros and cons of each option, you trust the facts (and your gut instincts) to make a decision. The same should be done when deciding between factoring and a bank loan.
The Pros and Cons of a Bank Loan
Traditionally, when someone needs money, they automatically think of a bank. After all, that’s probably where all your money is so you go there for checking accounts, to save money, keep your valuables safe, request a mortgage and to help you manage funds.
Most people regard their bank as a safe haven. There is a vault, your money is insured by the federal government against loss and you can sometimes even earn interest just by letting your money sit there. So, when you need access to cash for your small business, a bank loan is probably the first thought.
A bank loan is good for well-established businesses that have been successful and whose owner(s) have stellar credit scores. With a traditional bank loan, you can take the time to gather all the pertinent information and shop around to compare the rates and fees of various banks.
One option is to seek out Small Business Association loan programs. They work with banks that are more likely to loan funds to a small business to help secure guarantees. However, it may still take up to two years to complete the process and get your money.
The truth is most small businesses will not qualify for a bank loan. Traditional banks, even small, local ones, require you to have enough collateral to back the loan and an excellent credit rating.
In many cases, if you apply for a loan at a bank, the most you will walk away with is a home equity line of credit. This means that you have to put up your house as collateral so if you have any difficulty repaying the loan, your family could be left without a place to live.
Advantages and Disadvantages of Factoring
You can turn to a factoring company for a fast business loan. The process of factoring involves selling your account receivables to a factor who will then give you cash based on a percentage of their value. By using a factor, you can get business funding faster than you could at a bank.
Nevertheless, if you need cash in a hurry to make payroll for the month, deal with an emergency or to grow your business, you may not get your money in time from a factor. With a factor, it could take up to three months to get money and their long-term contracts typically lock you into a two year repayment schedule. They also have expensive fees which get added to the cost of your loan.
It is also important to note that factoring requires your customers to pay their money to the factor. Unlike getting a bank loan, using a factor means that everyone, including your employees, will know about your financial difficulties.
Other Options for Quick Business Funding
With banks and factors, you are left with a long term solution for what is probably a short term problem. When most small businesses need cash, it is usually a temporary setback, such as an accounts receivable gap where you just have to wait 30, 60 or 90 days to get money but have bills due today.
You should be aware that factoring and bank loans are not the only games in town. There are also cash advance companies, like Financing Solutions (www.fundmypayroll.com), available for instant business financing.
A cash advance company can often deliver same day business financing. The application is quick and you can be approved just by answering a few questions. Best of all, you can repay the funds in a few weeks or months. In addition, the money can be used for any purpose, such as making payroll or for working capital financing.
There is no small business like your small business and only you know what it will take to keep it moving forward. As you investigate the best choices for business financing, make sure to put cash advance companies on your list.