Loans or Factoring: Why You Don’t Have to Pick Your Poison | Behalf

By February 6, 2017Factoring
choosing between loans or factoring

Loans or Factoring: A Closer Look

Many companies consider only two options when they shop for financing: loans and factoring. After weighing the pros and cons, they settle with whichever option best meets their business needs. Herein lies the problem: your company should not have to “settle” for financing. Thanks to technology and data, the lending industry has progressed to the point where there are numerous types of financing to empower your business. Take into account the reason you are looking for financing and evaluate your company’s health. If it is hemorrhaging cash, you need to find the source. Does your company itself need financing or do your customers need it? Often the line between business and customer financing gets blurred. If your customers fail to pay or pay slowly, they might be the source of your company’s financial woes; in which case, your company should move the burden of financing onto its customers, where it belongs. Otherwise, the issue may be internal. When you reach a conclusion, consider all of the possible business or customer financing options available. This article offers a brief explanation of loans and factoring and why they should not be the only forms of financing you consider.

Loans at a Glance

Loans best serve companies with a specific need for funding because they are drawn all at once. With a loan, lenders give a lump sum of money upfront that the borrower pays back monthly, over the life of the loan. Depending on the lender, loans can be affordable or costly but one thing’s for sure: they are inflexible. You can typically only use loans for a specific, pre-approved purpose. Your lender may put in multiple approval steps throughout your process to ensure you do not misspend – at each step requiring another bank approval or sign-off. These checkpoints, while designed to be safeguards, can put your business progress at risk.

Factoring at a Glance

On the other hand, factoring best serves companies that extend trade credit to their customers. They experience a delay between when customers make purchases and actually pay for them. As a result, their accounts receivable departments struggle to make collections with slow and non-paying customers. Outstanding receivables accumulate, which ties up working capital they could use to cover their company’s operational expenses. Factoring expedites cash flow by allowing companies to sell their outstanding invoices for a cash advance. Once factoring companies assume ownership of the outstanding invoices they make collections. Though the factoring process seems convenient it is incredibly expensive and reduces a company’s profit margin overtime.

Why You Don’t Have to Pick Your Poison

There’s a high possibility that neither loans nor factoring meet your company’s unique business needs. For that reason, companies that only consider loans or factoring to finance their customers or business do themselves a disservice. If weighing the pros and cons of loans and factoring feels like picking your poison, consider an alternative. Don’t settle. Your company may be a great candidate to accelerate receivables by introducing a financing program to your customers. The alternative lending industry has made flexible, affordable financing not just a possibility but a preferred customer payment method among established business buyers.

Technology and big data have transformed business and customer financing with on demand payment tools. Instead of lengthy in-store applications, fast online applications give companies and their customers instant decisions. With cloud data storage, alternative lenders can access more of their borrower’s information. Alternative lenders can quickly evaluate if their borrowers are creditworthy and give them access to funds at a cheaper cost. As a result, the internet has become a marketplace for lending.

Your company should consider all of the options: loans, factoring, merchant cash advances, line of credits, etc. For example, Behalf’s business purchasing line of credit allows companies to affordably maintain a trade credit and remedy payment delays. Offering your business customers a Behalf purchasing line of credit can increase their purchasing power up to $50,000. Unlike factoring, Behalf’s purchasing line of credit has a transparent fee structure with no hidden fees and an affordable rate. Your business customers can make larger, more frequent purchases when they use the line of credit to pay you, the vendor. You get paid within 1 day and your customer can customize their payment schedule and extend payment to Behalf up to six months. The funds on their line of credit replenish as they pay, giving them constant access to working capital.

Learn more about how Behalf is transforming the way businesses buy and sell here.