Bank Line of Credit vs Invoice Factoring

business owner interested in difference between a line of credit and invoice factoring.

Cash flow is the lifeblood of any business and it ensures its survival, growth, and success. For a company to reach its full potential, having continuous working capital available is critical to managing the daily activities of your company. Ensuring a constant influx of cash flow can also leave more room to invest in future opportunities, allowing the business to expand and grow.

Lenders are usually willing to provide financing using accounts receivable as collateral.  There are two ways to borrow against your accounts receivable: bank line of credit or invoice factoring.  A bank accounts receivable line of credit is the best and least expensive working capital solution, but it is more difficult and time consuming to obtain than invoice factoring.

Banks focus on the five C’s of credit:

  • Character – the borrower’s experience and reputation
  • Capacity – the borrower’s debt-to-income ratio and ability to repay
  • Capital – the amount of money the company & owners have
  • Collateral – assets that can secure the loan
  • Credit Score – credit scores for the business and its owners

The difference between Bank Loans and Invoice Factoring:

Bank LoanInvoice Factoring
2 – 3 years in business requiredEven new startups can qualify
Require good credit scores for owner & businessBased on the business’s Customers having good credit.
Can take a month for approvalInitial approval and setup done in 2-3 days.
Cap on amount loanedUnlimited funding.
Annual renewals can require audited or reviewed financials & personal financial statementsMay require unaudited business financial statements.

Banks require you to fulfill all five of these credit requirements, and their approval process can take up to a month. Many companies, such as start-up companies, fast growing companies, or companies with cash flow problems are not able to qualify for a bank line of credit.  Often this is due to a combination of insufficient capital, limited industry experience, low capacity, and prior and/or current credit problems, as evidenced by low credit scores for the business and/or it’s owners.

What happens if your bank turns down your A/R Line of Credit request?

It might seem that after a bank turns down a loan request, a borrower’s options are very limited. However, as noted above, the traditional bank loan approval process is much stricter and longer than the invoice factoring approval process is.  Getting approval for invoice factoring should only take 2-3 days and you will be able to get funded a day after that.

What happens if your bank cancels your Line of Credit?

If your bank calls in your loan or credit line, step back and think about this. Lenders should know that most borrowers can’t simply write a check and pay off their line of credit balance; otherwise they wouldn’t need one. However, bankers only have two things on their mind. To get your loan paid off and to keep your loan off the bank’s past-due list. That said, most lenders are not likely to immediately foreclose on the collateral, or pursue your personal guaranty. Many lenders will work with you to find a way to pay off the loan.  However, things may quickly change if your bank tells you your loan will now be handled by their Loan Workout Department.  If that happens, we can help you deal with the additional work that will now be required by that Loan Workout group.

Invoice factoring could be the quick solution to your cash flow problems. It will be if your business sells to other businesses, invoices them, and carries accounts receivable on its books.  Then invoice factoring will be the easiest and quickest way to replace the lost line of credit, and pay-off your existing bank debt. Also, getting approved with a factoring company should only take 2-3 days for approval and setup. So it is a quick response to the bank’s demand to be repaid.

Invoice factoring is available to your company even if you:

  • Are a start-up with limited operating history
  • Have a steep projected revenue growth curve
  • Are marginally profitable or losing money
  • Have a weak balance sheet, including limited capital
  • Are in violation of bank covenants
  • Are in forbearance or workout at a bank
  • Need financing to pay off a traditional line of credit

Invoice factoring is a simple and quick process to solve cash flow problems. The fact that 2-3 years of operational history and credit are not the main criteria for approval make it a perfect solution for new businesses, growth situations, and businesses struggling with cash flow problems.  For these businesses, invoice factoring is a lifeline to success.

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