Why Factoring and Receivables Finance Is a Better Solution than Traditional Lending for a Small Business

Small business owners face many challenges today in the course of business. The nature of owning a small business means operating with limited time and resources when compared to a larger business. Often, owners find themselves in need of quick cash with really only two options available- borrowing money or the process of receivables finance. A quick comparison of the two shows receivables finance is a better solution for small business owners.

Account receivables finance, commonly known as factoring, is the process of selling your receivables or invoices to a third party for cash. For a small business owner there are numerous benefits of doing this. Factoring is quick, easy, and simple to implement. The initial setup usually takes less than five days, and once approved, cash is usually available within 24 hours. This saves you valuable time in the application process because there is no lengthy form to fill out, and you have almost immediate access to capital if you need it. The waiting period is virtually nonexistent compared to the regular cycle of waiting for your customers to pay their invoices. In addition, when you use factoring, your company takes on no debt. This process is not a loan- it is receivables finance. The company that buys your invoices finances you based on your customer’s individual credit scores and payment schedules. There is no request for your company’s score or financial statements. Factoring costs nothing to start the application process in most cases, and the amount you pay the company will usually be a small percentage of the invoice amount.

In comparison, traditional lending can be very time consuming. Banks traditionally have very thorough and lengthy application processes, numerous forms to fill out, and meetings in person. Banks are also concerned with your company’s financial history and will often request financial statements, credit history, and personal information. This process can often take one to three months, which is longer than the average small business can wait for an inflow of cash. In addition, once the loan is in place, repayment involves principal and interest. The loan becomes a debt on the balance sheet of your company, which can make it harder to find financing in the future should your company need it.

As you can see, the smart choice for small businesses would be to choose receivables finance over traditional lending. It saves time, assets, and gives the owner access to immediate capital.