Businesses have been using short-term loans as stopgap solutions for everything from filling in gaps in revenue to making purchases, and even paying off larger debts when the capital is not on hand. Invoice factoring is used by businesses to improve cash flow so they can cover expenses. But how to compare invoice factoring?
1. Single-Purpose and Discretionary Capital
Short-term business loans have specific purposes that are usually detailed in the loan agreement. A business that takes out a short-term loan for the purpose of making payroll cannot use the loan to make purchases, upgrade equipment, or launch a marketing campaign. Short-term loans are single-purpose financial products. Comparing invoice factoring provides businesses with discretionary capital, meaning the funds can be used for anything a business needs or wants without penalty.
Advantage: Invoice Factoring
2. Access to Funds
Any business that has taken out a short-term loan is familiar with the red tape and waiting period before they can access the funds they need. The loan application needs to be approved, and the closing time is typically upwards of two weeks. Invoice factoring is a fast and efficient process. Business invoices are converted into cash and the funds are made available within 24 hours.
Advantage: Invoice Factoring
3. Debt and Credit Ratings
Short-term loans are all structured around collateral and debt. Collateral is used to secure the loan, which places debt on the books and lowers credit ratings. Since the start of modern banking, loans have worked this way. Invoice factoring, by contrast, is not a debt-based solution. Businesses that use invoice factoring do not have to deal with debt, and there is no impact on credit ratings.
Advantage: Invoice Factoring
4. Balance Repayment
When a business takes out a short-term loan, the balance needs to be repaid with interest. Every month, the business must make a payment, regardless of if sales are high or low, or if it means placing other projects on the back burner. Invoice factoring does not have a balance or ongoing payments. Businesses send in their unpaid receivables and the invoice factoring company turns them into cash, minus a small fee. This allows businesses to focus on operations and growth plans without worrying about budgeting for monthly installments.
Advantage: Invoice Factoring
When comparing business loans vs invoice factoring, New Century Financial is an invoice factoring company that works with businesses of all types to help them improve their cash flow and build up capital reserves without the drawbacks of debt-based loans. To learn more, contact New Century Financial today.