Is Invoice Factoring the Same Thing as a Line of Credit?
Small- and medium-sized businesses have options when it comes to short-term financing. They can take out small business loans. They can apply for hard money. They can establish lines of credit or look at invoice finance options. These last two are the basis of this post, specifically in terms of whether invoice factoring is the same as a line of credit.
We understand that business owners can find financing confusing. Business financing is similar to personal financing in some ways, but drastically different in others. Between financing options and industry language that can be hard to understand, it is no surprise that finding the right financing option isn’t an easy task.
In short, invoice factoring is not the same thing as a line of credit. Keep reading to learn how they differ. As you read, keep in mind that factoring invoices is our specialty at fastFACTR.
Lines of Credit
Lines of credit are credit instruments that can be extended to either businesses or individuals. An individual might obtain a line of credit based on the equity in their home, for example. Overdraft protection on a checking account is another type of credit line available individuals. For businesses, there are basically two types of credit lines:
1. Bank Line
A line of credit from a bank is very similar to overdraft protection on a checking account. You apply for credit based on your financial situation. If approved, the bank offers a set amount you can borrow as-needed. You do so simply by writing checks. Each month, you pay back what you owe plus interest.
2. Vendor Line
A line of credit from a vendor is less like a loan and more like paying with a credit card. Simply put, a vendor provides goods or services and allows the business owner a certain amount of time to pay the bill. Terms are typically 30, 60, or 90 days. And just like credit card accounts, vendor lines of credit have upper limits.
Invoice factoring is another type of short-term financing obtained separate from banks and vendors. Instead, a business works with a factoring company like fastFACTR. The factoring company buys invoices from the business at a slightly lower value than those invoices are worth.
The concept of invoice finance is essentially borrowing against existing receivables. A company’s receivables are a legal asset through which it can raise cash. Invoice factoring offers some definite advantages over bank loans and lines of credit. For example:
1. Application Is Easier
Though factoring companies all have their own ways of doing things, the general rule of thumb is that invoice factoring involves an easier application process. Companies do not have to supply stacks of documentation, financial statements, etc. Documentation needs are fairly limited compared to other types of financing.
2. Approval Speed
Where companies can wait weeks or months to be approved for traditional financing, invoice factoring can be approved much more quickly. We cannot say how quickly due to the differences among factoring providers, but certainly more quickly than most of the other options.
3. On Demand Financing
Once a company opens a line of credit, it remains static until it is officially closed. On the other hand, invoice factoring is more like on-demand credit. A business sells invoices to the factoring company only as needed. That gives them greater control over their financing picture.
Invoice factoring and lines of credit are not the same thing. They both have their place at the table, though. If you find that invoice factoring is the better way to go for your business, feel welcome to contact fastFACTR.