When it comes to any type of financial decision for a business, exploring the options and choosing with a good understanding of the short and long term impact of the decision is important. Making a choice between a loan, factoring and a line of credit can be the difference between having the cash you need or getting into a long-term repayment option.
There is another option that is sometimes confused with factoring and a line of credit – the financing of receivables. It is more like a traditional loan where the accounts receivables are held by the lender as a form of collateral. However, this is not as common as lines of credit, loans and factoring.
Loans
Many businesses have a difficult time successfully applying for a loan. This is usually because the business doesn’t have enough years as a company, there are some bad credit issues with the business or the business is considered too risky for a loan for other reasons.
Loans also require a lengthy application process that can sometimes take weeks to wait for the approval. Of course, there will also be a repayment schedule as well as interest, which can result in future cash flow problems. Additionally, the loan will be recorded on profit and loss statements for the company.
Lines of Credit
As with loans, lines of credit also have interest that will begin to accrue as the business uses funds from the line of credit. While it does provide more control over repayment of principal and interest as you can control how much is used from the credit line, it can still result in long-term repayment considerations.
Lines of credit are also difficult for businesses with less than ideal credit to obtain. There may also be fees associated with the service even when there is no outstanding balance.
Factoring
When businesses choose factoring over a line of credit, they bypass the issues with interest, principal repayment and long application processes. They also avoid the long wait for approval.
Factoring provides immediate cash based on up to 80% of the value of the accounts receivables. With approval in 24 hours and cash in days, this is a great option to consider for a business of any size.
