What is the difference between Factoring vs Accounts Receivables (A/R) Credit Line?
- What is the difference between Factoring vs Accounts Receivables (A/R) Credit Line?
- Invoice Factoring (Yes) vs Accounts Receivable Bank Financing (No)
A Bank A/R LOC is Balance Sheet Driven. A Factor Buys A/R.
One of the main differences between invoice factoring (also known as A/R factoring) versus bank accounts receivable financing is that a line of credit from a bank or asset-based lender is balance sheet driven. If you do not have a current and believable balance sheet or your balance sheet is weak, a line of credit based on your accounts receivable is unavailable to you and your business.
Speed is another reason to choose non-recourse invoice factoring. Factoring can be 2-5 days from application to first funding. Meanwhile, a bank line of credit could take months and still not close.
If you have a personal credit score below 650 or poor business credit, most banks can’t help you either. Another reason a bank or asset-based lender declines your line of credit request is your Tax returns. The last two years of your returns need to show enough cash flow and collateral coverage to cover your loan or credit facility. You might get a line of credit (LOC), but it might be much smaller than the non-recourse factoring facility you receive from Bankers Factoring and at a high-interest rate.
When does invoice factoring work better than accounts receivable (A/R) financing?
In many business situations, a bank line of credit or A/R Financing is not available or will not work to solve your cash flow problems. A more aggressive source of working capital financing is needed, like Invoice Factoring. That is why you are visiting Bankers Factoring today to review our funding options.
The following challenges are difficult for a bank to overcome but are typical factoring situations for a small business finance company like Bankers Factoring and its clients. Why are business loans rejected? Here are just some of the reasons business loans are declined.
Invoice Factoring (Yes) vs Accounts Receivable Bank Financing (No)
- The bank loan facility declined
- Balance Sheet weak
- Bankruptcy (DIP Financing)
- Extended selling terms of 90 days for customers to pay
- High debt or inadequate company net worth
- High or single-customer concentration
- Highly leveraged
- Need A/R financing to buy a company
- Inadequate advance rate
- Inadequate existing revolving loan facility
- Large prior customer write-offs
- Largest order in the company’s history
- Leveraged or management buyouts
- Need accounts receivable help
- Newly formed or early-stage start-up
- No vendor support or terms
- Non-compliance with required loan covenants
- Owners with limited net worth and/or bruised personal credit
- Payroll tax issues or tax liens
- Poor or non-existent credit history
- Potential acquisition
- Private equity-backed
- Too small or too big for your current factoring line or company
- Turnaround or restructure
- Unhappy with existing invoice factoring services or asset-based lending relationship
Invoice Factoring can be more expensive on the surface. Still, it can be much safer (from a non-recourse factoring company), and the amount of working capital can be much greater than what accounts receivable financing from a bank will offer.
Net of costs, you end up with higher and safer profits by selling your invoices to a Non-Recourse Invoice Factoring Company like Bankers Factoring versus borrowing money from a traditional business funding lender via accounts receivable funding.
Chris & Michael helped us get started and grow our business to where it is today.James C, Directional Boring Factoring Client