Invoice Factoring vs Business Loans

Updated: 5 July 2022

You’ve probably considered business bank loans, but you might not be as familiar with invoice factoring. Here we look at these two solutions for alleviating pressure on business cashflow.

Let’s look at business bank loans first. A business loan allows you to borrow a particular amount of money over a specified amount of time, usually with fixed interest rates and set monthly payments.

The majority of business loans are repaid within one to three years. However, in order to even be considered for a bank loan, the business most likely will have had to be in business for a period of time, with proof of credit worthiness.

Invoice Factoring is designed to bridge the cashflow gap between you issuing an invoice to a customer and waiting anything from 30 - 120 days for that invoice to be paid. This allows you to release your cash from work you’ve already done, without the need for additional borrowing.

With an invoice factoring agreement, you get paid between 80 and 95 per cent of the value of the invoice within 24 hours of issuing it. A second payment is usually made to you when the customer repays the invoice, less the factoring service fee.

A financial services provider dealing in invoices will still want reassurance the business is creditworthy, but they take a whole raft of other criteria into account because the collateral is the invoice. You may therefore find that invoice factoring is available to you, when other funding options aren’t.

Whatever product you choose really depends on why you want it. Invoice Factoring works better when you are seeking to bridge a cashflow gap caused by waiting for customer payment. By getting access to customer payments faster, it means you can pay your employees on time, negotiate preferential rates with suppliers, or invest more into growing your business. There’s no need to dip into the business savings account or add to your overdraft.

Bank loans tend to work better if you’re buying assets for the business or have a large, one off payment, to make.

Ease of applying

Providers offering invoice factoring solutions tend to be more interested in the creditworthiness of you and your customers – they will consider those with bankruptcy in the past and those starting-up.

There is no need for you to provide assets because your invoices are your assets. You also receive reassurance because there is no doubt, a factoring organisation looking to do business with you, will do credit checks on your customers before offering you an agreement; meaning you have more information on the credit health of your customers.

Qualifying for a bank loan is different – organisations tend to set their own criteria with regards to credit scores, profitable books and qualifying assets to underwrite a loan. If you have a bankruptcy in the past, it is significantly more challenging to obtain a bank loan.

All loan providers will wish to see documentary evidence of your business, and will look at balance sheets, income statements, customer pipeline evidence, accounts and tax returns, as a means to making their decision.

Funds available to you

When you factor your invoices, once the agreement is up and running you will usually receive payment within 24 hours of issuing your first invoice. Arranging a bank loan can take weeks, depending on your financial provider and the complexity of the deal.

Fees owed

Costs are variable depending on the anticipated number of invoices a factor will handle, and over what time period. Factoring contract fees vary between 1% and 4% per 30 days.

With a bank loan, typical APR is up to 15%. If you want to add to the funding line, you’d need to renegotiate the deal which could take many more weeks. However, with invoice factoring, the more invoices you issue, the more cash you will receive without the need for renegotiation.

In general, loans are best used to support one-off projects or to purchase property.

Whatever you decide, make sure you choose a solution that does not add more burden than is necessary on your business.

Bibby Financial Services provides flexible, invoice factoring solutions designed to bridge the cashflow gap in your business. For more information, call us on 0808 501 6462.