Businesses tend to experience cycles. These cycles can include seasonal variations as well as market factors that lead to times of increased business and times when growth is slow, or there may even be a need to downsize.
In addition to these big cycles, most companies in B2B sales experience ongoing cycles. This is due to the nature of the business where your company provides goods and/or services, then has a gap between the fulfillment of the contract and payment. This 30, 60 or 90-day period can seriously impact the cash flow for business, which is where a business owner has to make decisions between factoring, lending and lines of credit for short-term funding.
To understand the differences and how they may benefit or cost a business, let’s take a closer look at factoring, lending, and credit lines for businesses.
Factoring
The first thing to realize is the difference in factoring, lending and lines of credit. Factoring involves a third-party, a factor, buying existing accounts receivable and advancing up to 80% of the total to the business in just days.
Then, the factor collects from the customer, deducts their fees from the withheld 20% of the accounts receivable total and forwards the residual to the business. This is not a loan or a line of credit, and there is no repayment or interest paid by the business, just the fees for the factoring service.
Loans and Lines of Credit
Loans involve a short or long term commitment to interest and principal repayment. As it is the business’s credit that determines the loan, these can be difficult for the company to obtain. There may also be additional fees and late charges that need to be considered in repayment.
Lines of credit only charge interest on the amount used by the business, which makes them a better option than loans. However, they are harder for a business to qualify for and most will have some fees for the service.
When considering options for short-term funding, most businesses, even those with very limited credit, will find that factoring is the best option for immediate cash at the lowest fees.
