Comparing Invoice Factoring and Business Line of Credit
Financing your business is an ongoing concern. Whether you are having a lull in sales and need some money to get through the rough patch or you need to make some changes that require cash, you will run into points throughout the course of your business when you need to find funding. There are many different options available. A couple choices include invoice factoring and a business line of credit. It helps to compare the two in order to understand which may be best for your business.
Invoice factoring involves a company buying your outstanding invoices for a fee. This company will then collect on the invoices for you while you get the money (or at least part of it) upfront to put back into your business without having to wait for your customers or clients to pay.
A business line of credit is similar to a credit card. A lender gives you an amount of money you can borrow and you tap into that as you need it. So, if you are given a line of credit of $10,000, you can borrow $500 one month, $1000 the next, and so on until you reach your limit.
With factoring, you don’t pay anything once the transaction is complete. The company makes it money through a fee taken from the invoice payment when collected from your customer or client.
A business line of credit requires monthly payments on any outstanding balance. You will also usually be charged interest and may be charged fees.
Comparing the Options
Invoice factoring is a little easier than a line of credit simply because it doesn’t require lengthy credit checks or long paperwork. Typically, you just need to fill out an application and submit your invoices. The turnaround is rather quick. Whereas with a line of credit, you have to fill out documents, undergo a credit check and wait for approval.
However, when it comes to overall cost, a line of credit may be cheaper. The percentage a company takes when factoring can vary widely depending on the company and your customers’ or clients’ history of payment. If you have people who don’t pay invoices on time or a lot of collection issues, you may end up being charged a larger amount. The factoring company will also break up a payment in two parts, issuing you partial payment up front and then the rest when the invoice is paid, so you may not even get all your money if the invoice isn’t paid.
Getting money for your business is essential. If you fall on hard times or end up in a situation where you need some money to make important changes, you have to be able to find good financing options. Invoice factoring and lines of credit are great choices. Just be sure you understand how each works and the terms of any deal you make.