When to Consider an Invoice Factoring Service Instead of a Bank

Business person choosing a factoring company

Not sure if a factoring company or a bank is right for your small business? Both can provide your company with working capital and help you cope with cash flow lulls, but factoring helps in ways loans don’t and can fill gaps left by traditional lending too. Below, we’ll break down how they’re different, what some advantages of factoring are, and go over a few scenarios when factoring might be more ideal than a bank loan.

How is Invoice Factoring Different from a Short-Term Business Loan?

Sometimes referred to as receivable financing, factoring involves selling your unpaid B2B invoices to a third-party, known as a factoring company. The factoring company provides you with immediate payment for the invoices and then waits for the customers to pay them.

A few of the things that make accounts receivable financing different from a loan are:

  • There’s no debt. Because you’re not borrowing anything and your customers are ultimately responsible for paying their invoices, thus paying the factoring company back, there’s no non-recourse debt for your company to pay.
  • Payment is faster. Companies like Charter Capital can provide you with same-day funding, unlike banks, which can take weeks or more to fund a loan.
  • There’s greater flexibility. You can pick and choose which invoices you’d like to factor and how often you want to factor.
  • It’s easier to get a qualification. Since credit checks and a minimum credit score aren’t as important compared to traditional loans. Your history and personal credit score are less of a concern because your customers are the ones responsible for repayment by virtue of paying their invoices.

Times When Factoring Services May be Better Than a Bank Loan

Given the benefits mentioned above, there are many times when factoring might be more ideal than a bank loan. A few common situations are outlined below.

You Have Slow-Paying Clients

As long as you’re invoicing customers after work is performed or goods are delivered, there will always be a payment gap. The problem is, sometimes customers can take weeks to pay their balance and still be within the letter of their contract. Factoring closes the gap for you and can work whether all your clients are sluggish or if you have a single customer who always seems to put your invoice off as long as possible.

You Want to Improve Cash Flow

Sometimes the gap between completing work and getting paid isn’t a huge deal, but if a cash flow lull is preventing you from growing or paying your bills, it’s essential to address the issue. Factoring is a simple, no-debt cash flow solution.

You Require Liquidity to Take Advantage of a Discount

Venders often offer discounts based on volume or the ability to pay cash upfront. Factoring can provide you with the cash you need to take advantage of discounts and special pricing that will save you money.

You’re Unable to Qualify for Loan or Line of Credit

As Harvard researchers have pointed out, banks typically have the same overhead for large loans as they do for small loans. There’s minimal benefit for them to offer smaller ones because they’re not going to earn as much profit. With that in mind, banks typically start at $100,000 or $250,000 loans, but most small businesses need less than $100,000. Even well-qualified small-business owners don’t always make the cut because the profit margin is too small for a large bank to bother. Factoring companies are geared toward filling funding gaps like these, so it’s easier to get approved.

You Have Debt Covenants with Other Lenders

Debt covenants are rarely spoken about, but they can really throw a wrench in small business finances. In short, lenders can throw all kinds of stipulations into a contract. For example, they may require that you maintain a certain cash flow level or forbid you from taking out other loans, and companies usually have penalties for violating these debt covenants. They may raise interest, charge fees, or even demand immediate repayment in full. 

If you have a loan with another company, you’ll need to check your contract to see which debt covenants apply and what the penalties for breaking them include. However, factoring is usually a safe bet that allows you to boost your cash flow as needed.

Your Credit History is Less Than Perfect

Although your factoring company will likely look into your credit history and business details, you aren’t the one paying the invoices—your customers are. Therefore, the factoring company will be more concerned with the history of your customers. You can qualify even if your credit history isn’t great.

You Have Recent Bankruptcies

You can almost forget about a bank loan of any kind if you or your business has recently been through bankruptcy. Again, though, factoring isn’t focused on your history, so bankruptcy isn’t a problem.

You Need Access to Cash Quickly

It can take weeks or months to get approval for a bank loan. With factoring, the approval process is incredibly fast, and you can get funding on the same day you submit your invoices.

How Much Does Factoring Cost?

Every factoring company will have different rates, and the rate you’re quoted will vary based on things like volume, the total dollar value of the invoices, and the length of time it takes your customers to pay. At Charter Capital, we take great pride in offering competitive rates to ensure your receivable financing more than pays for itself. Some of our factoring fees are as low as one percent.

Which Industries Use Factoring?

Generally speaking, factoring can be used by all B2B companies. So, if your business bills other businesses for goods and services after they’ve been delivered, it can work for you too. However, a few industries leverage it more often than others.

Freight

In trucking and freight services, it’s common for the business to wait 30-90 days for payment. That’s not always feasible for small trucking companies, let alone owner/ operator firms. Factoring companies are a huge help here, allowing truckers to keep their wheels on the road and keep running loads without worry about delayed payments. At Charter Capital, we also help freight brokers. Our expertise in transportation and logistics gives the companies we serve an extra edge.

Construction

Subcontractors are often in a tight spot. Supplies need to be purchased, and projects need to stay on track to meet deadlines, but unpaid invoices can leave firms without the capital necessary for either. Invoice factoring eliminates that cash flow gap, so that construction can continue without delay.

Real Estate

Sometimes referred to as a real estate commission advance, factoring helps agents and brokers shorten the gap between the time a sale is agreed upon and the day payment is made. Given that closing can take weeks or months depending on the number of hiccups, the advance helps ensure real estate professionals have access to working capital to apply to things like marketing so that they can move onto the next big sale uninhibited by the wait.

Staffing

Staffing agencies naturally have immense payroll costs and their own overhead to manage but often wind up waiting months after they’ve paid employees to receive payment from their clients. Factoring helps staffing agencies meet these types of short-term needs and can also provide capital for bringing on additional employees.

Oil and Gas

It can be a huge win for an oilfield service company to land a contract with a large energy corporation, but the big guys have lengthy approval processes for invoices that often require multiple approvers and weeks of waiting. With factoring, the cash comes in quickly, so there’s working capital for equipment, payroll, and other business needs.

Connect with a Leading Factoring Company for a Free Rate Quote

If your business is struggling with cash flow or needs a quick capital injection to fuel growth or cover an urgent expense, accounts receivable financing may be your ideal solution. Contact Charter Capital for a complimentary rate quote.

Sr. Vice President of Operations at Charter Capital, a leading invoice factoring company for small to mid-sized businesses. Headquartered in Houston, Texas, Charter Capital provides accounts receivable financing and asset-based lending for major industries including freight and transportation, consulting firms, service providers, staffing firms, distributors and manufacturers, an oil and gas service companies.