6 Advantages of Invoice Factoring vs Bank Financing Tools in 2022

With interest rates climbing you may be wondering if there are better business financing tools available. If you’ve never considered invoice factoring before, we’d like to tell you about six advantages you’ll get with invoice factoring vs bank financing tools like loans or lines of credit.

Invoice factoring vs bank loans or lines of credit

*As of the date of writing

1. The cost of financing is lower with invoice factoring

With bank loans and lines of credit come not just interest–but compounding interest. Now that interest rates are rising this equates to hundreds or even thousands more dollars in terms of the cost of financing.

With accounts receivable invoice factoring, a low one-time factoring fee is usually the only cost of financing. We work with some of the best invoice factoring companies in the USA. They offer fast funding (which we’ll talk about next) as well as competitive fees. Most of the time they will be in the ballpark of 2-6%.

Curious about the real cost of invoice factoring? Use our invoice calculator to see an example of an invoice factoring fee based on the average amount of your invoices or your outstanding accounts receivable portfolio as a whole:

2. The speed of financing is faster with invoice factoring

When was the last time you applied for bank financing? Chances are it took weeks (or even months) to get approval, and during that time you spent hours finding and providing documentation (and may have been asked to provide the same types of documents several times).

Compare that to the invoice factoring process, where you could go from invoice factoring application and account approval to funding in a matter of a couple of business days. What’s more, while bank underwriters seem always to be looking for reasons to say no, invoice factoring companies look for reasons to say “Yes!”

3. Invoice factoring is more flexible

Bank loan and line of credit financing often comes with stipulations as to use. You can use the money you unlock by factoring invoices for any business purpose. Here are some of the most common:

• As a payroll loan or payroll financing tool
• To cover unexpected expenses
• To take on new business faster
• To take on bigger accounts or fulfill larger orders
• To act on an emerging opportunity, such as opening a new location or purchasing a competitor’s book of business
• To fund capital expenses like technology, equipment, or facilities
• To expedite cash flow to take advantage of quick pay and cash discounts with your suppliers

And something we haven’t talked about here really, expediting cash flow. Taking on a bank loan or line of credit reduces your available cash flow as you are required to repay the amount. With invoice factoring, you’re literally speeding up cash flow, unlocking working capital you’ve already earned.  And expedited cash flow creates all kinds of growth opportunities.

4. Low credit scores don’t impact your ability to factor invoices

This is a biggie. A lot of banks won’t even process your application if you have a low credit score, or if you haven’t been in business long enough to have an established credit reputation. If you invoice customers on terms or get earnings statements through third party distributors or ecommerce platforms, factoring is available to you no matter what your credit history looks like. Likewise, it’s available to new businesses from day one.

5. No collateral is required to factor invoices

The underwriting process for bank financing exists to ensure your ability to repay the loan or line of credit. As one consideration, they may even require that you assign business as well as personal assets as surety against repayment of the loan. With invoice factoring, the accounts receivable invoice acts as its own collateral against repayment.

6. Invoice factoring is there when you need it

A lot of companies that factor invoices only do so on occasion. It even has a name: spot factoring. In most cases, the only form of emergency funding available to your business through banks is going to be credit cards, which have astronomical interest rates, especially compared to one-time factoring fees as low as 2%.

By contrast, if you’re already approved to factor invoices and an emergency arises, such as the need to quickly repair or replace equipment, you can free up working capital in as little as a day (or even faster). Unless you’re preapproved for a bank line of credit, bank financing tools can’t touch this.

Interest rates are on the rise and with that, the cost of money to grow your business is going up, up, up. If you’ve been looking for alternatives, we’d love to connect you with a top invoice factoring company. They’ll give you all the information you need to know if factoring can benefit your business and give you a free, no-obligation quote for the all-in cost of this form of business financing.