Comparison & Alternatives: Invoice Factoring vs Bank Loan

Comparing invoice factoring to a bank loan is kind of like comparing apples to oranges. The better question isn’t which one is “better,” but which one fits your business right now and where you’re headed in the near future. Both options have their own pros and cons, but the real deciding factor usually comes down to how much funding you need and how quickly it’s available.

Ask yourself some basic questions.

• How quickly do you need the money?
  A bank can take anywhere from a couple of weeks to as long as 90 days just to make a credit decision.
• How much do you really need?

  If your business is growing fast, a small bank loan might not give you enough runway to keep up with that growth. If you try to go back and ask for an increase without a long track record, getting that extra funding can be an uphill battle.

Here are some common qualifications banks look for when approving even a small business loan:

• Time in business – Typically at least 2-3 years of operating history.
• Credit score – Strong personal and/or business credit history (often 690+)
• Profitability – Some lenders prefer to see that the business is profitable or on a stable path to profitability.
• Financial reporting — Are your financial reports up-to date and reliable?
• Collateral – Assets such as real estate, equipment, or receivables may be required to secure the loan.
• Debt-to-income ratio – Healthy cash flow and the ability to cover loan repayments.
• Business plan – A solid plan showing how the loan will be used and how it supports growth.
• Industry type – Certain industries are considered higher risk, which may affect eligibility.

When a Bank Loan is the Better Choice


If you qualify for a bank loan that’s large enough to cover your current sales and projected sales growth and your day-to-day working capital needs, there’s really no comparison a bank loan will usually be the best option. You’ll often get lower rates and fixed repayment terms that can help with long-term planning.

When Factoring Might Make More Sense


But what if you can’t qualify for a bank loan, or the bank only approves an amount that doesn’t come close to meeting your short- or near-term needs? That’s where invoice factoring shines.

Qualification is a fraction of what’s required by a bank and can be put together in a few days. Instead of being capped by a limited loan factoring lets you unlock cash from your invoices as you generate sales.

The more you sell, the more funding is available, which can be a game-changer for businesses growing faster than banks are willing to support.

Bank Loan vs. Invoice Factoring