What Makes Invoice Factoring So Different from Loans?
Businesses have options when it comes to raising cash. Small business loans and their hard money counterparts are the first things that come to mind. But there is another option known as invoice factoring. Invoice factoring is a different way to raise cash. In fact, it is not even in the same league as bank and hard money loans.
What makes invoice factoring so different from loans? A number of things. Some of the key differences are described below. As you read, bear in mind that Thales Financial specializes in invoice factoring.
Factoring Companies Are Not Lenders
The first thing to note is that factoring companies are not lenders in the traditional sense of the word. We are not banks, credit unions, or private lenders loaning out investor funds. Rather, factoring companies are service providers. We provide a financial service for which we charge a fee.
Because factoring companies are not true lenders, our service is not governed by the same rules that apply to small business and hard money loans. That allows us to do things a little bit differently.
Factoring Involves a Direct Purchase
Invoice factoring involves a direct purchase rather than a loan. When you work with a factoring company, that company buys your unpaid invoices. It is a legal business transaction that transfers ownership of those invoices to the factoring company.
This is possible because invoices, under the law, are considered tangible assets. They can be traded just like real property, securities, and court judgments. You can sell unpaid invoices to us just like you sell your products or services to customers.
Funds Are Received in Installments
When you take out a business loan, you get the entire amount borrowed up front. Invoice factoring doesn’t work that way. Factoring companies offer their customers a certain percentage of an invoice’s value up front – minus the factoring fee, of course. The remainder of the money is paid when the invoice in question is paid.
How much you might receive in that first installment depends on the value of your invoices and the factoring company you work with. Every factoring company is free to set its own policies in that regard.
Factoring Can Be Utilized as Needed
Finally, invoice factoring can be utilized as needed. This differs from loans in the sense that a company does not have to get locked into a multi-year deal just to raise cash for some immediate financing needs. Not being locked into a long-term loan has its advantages when it comes to the bottom line.
Although invoice factoring is a way to raise cash to meet short-term financing needs, it is not a loan. Factoring and loans are different in so many ways that it’s hard to do those differences justice in a single blog post. Hopefully, you at least understand the basics now. If nothing else, remember that invoice factoring is an option.