When comparing means of financing for your company, it pays to weigh the pros and cons of invoice factoring against traditional bank loans. With traditional bank financing the application process can be slow and very demanding on your company. Banks typically require a great deal of documentation to support your ability to repay a loan, from business plans and financials for a few years past, to anticipated cash flow and credit rating scrutiny. With invoice factoring, though, the focus of the scrutiny is on the company’s accounts receivable, that is, the customers who have bought goods and services from your company.
Factoring Fees vs. Interest Rates
When looking at the surface appearance, it may seem that the fees involved in invoice factoring add up to more than the yearly interest paid on a bank loan. This misperception is based on considering the amount of the fee, perhaps two percent of the total face value of the accounts receivables sold, over the year, which can lead to a deceptive appearance of 24% annual rate. In truth, though a business that factors $100,000 worth of invoices per month at 2% will pay $2,000 in fees monthly. Multiplied by 12 months, the company will pay a total of $24,000 in fees to the factoring company, in return for a total of $1,176,000 in ready cash flow (12 months x $100,000 in invoices per month = $1,200,000 minus the $24,000 in fees throughout the year).
In comparison, a one time $100,000 bank loan with a 12 % APR, with a minimal payment of $1,000 per month, will have cost your business $12,000 in interest, but you will still owe the $100,000 principle on the loan. Factoring is the cash flow solution that provides you with usable income that your company needs for growth, for payroll, or even for debt payments, without saddling your company with further debt or long-term obligations.
Balance Sheet and Efficiency Benefits of Factoring
In addition to the low cost of accessing ready cash flow by selling your company’s invoices, you will benefit from other aspects of the debt-free cash because the funds are unrestricted, unlike many traditional line-of-credit or loan structures that may require the cash provided by the bank to be limited to certain specified uses in your business. Factoring frees up unrestricted cash that your company can use as needed.
Further, the speed and efficiency of accounts receivable financing is unrivaled in the business loan world, able to turn around ready cash in as little as 24 hours when you have an established relationship with a factoring company. Finally, the decreased stress on your company’s accounting department will be appreciated, as factoring does not rely on intense scrutiny of your company’s financials to approve payment, as it is more concerned with your customer’s ability to pay, since it is they that owe the money that will be collected by the factoring company. Invoice factoring is a financing option that many successful companies can use to provide ready cash flow on short notice.
Check out the benefits of Invoice Factoring with Durham!