Owners of small and medium-sized enterprises in Hollywood, FL, often struggle with meeting credit score requirements for loans – especially those with a previous negative credit or ones just starting to build theirs. If you are in this dilemma, you may look for alternative funding options, such as factoring services.
Every business needs funding at some point, whether it’s for starting a company, meeting payroll during the off-season, getting new equipment, or expanding. Unfortunately, not every type of funding is available for everyone.
Fortunately, alternative financing options like invoice factoring have become widely available to provide support. So today, we’ll discuss why companies are choosing factoring over traditional bank loans and its pros and cons.
How a Bank Loan Works
As you already know, a bank loan is borrowed for a set period with a payment schedule. For example, you’re borrowing $10,000 for six months – usually, you will need to pay monthly on this. The bank will provide an interest rate upon loan computation so you know how much you will pay regularly. The repayment amount is dependent on the duration of the loan and the rate of interest.
Remember, there are short-term and long-term loans. Depending on the kind you’re taking out, some loans can last up to 10 years.
Loan terms will depend on the financial institution providing it – banks or lending companies have different terms and requirements to comply with.
Here are some of the basic requirements banks will need to assess your application:
- Your business financial statements, including balance sheets, income statements, and cash flow statements.
- A bank account history.
- A detailed list of your current business debt.
- Evidence of a strong business credit history.
- Collateral in the form of real estate, equipment, inventory, or accounts receivable.
- As an owner, your tax returns for the last three years are also required.
- A personal financial statement and proof that you have no delinquent tax liabilities.
- A personal credit score of above 700 is pretty much standard as well.
- Other requirements of your bank.
This list can be a hefty load of paperwork for both new and old businesses. Most of these items should also be prepared by a licensed CPA. However, banks will not consider incomplete loan requirements, so it’s best to take your time and complete them.
The Next Steps for a Loan Application
Once you fulfill the application and requirements specific to your loan, it will undergo an evaluation process of a few weeks, which can take up to 6 weeks, depending on the case. Then, a credit decision will be made.
Your loan is not guaranteed to be approved even after providing all the information and necessary documents. Sometimes, loans get declined no matter how qualified you think you are, and that is because of one major factor – credit check. This hinders even the most qualified applicants from obtaining loan applications. Unfortunately, a loan reapplication will be available to you after about 90 to 180 days.
Bank Loan Pros and Cons
Before jumping into the wagon, you should note bank loans’ advantages and disadvantages. This will give you a better understanding of whether this loan will benefit your business given the terms.
Pros:
- Loans have a repayment schedule and cannot be repaid on demand – unless you breach a condition.
- You don’t have to split your profits with the lender – interests are already in place.
- Interest rates can be fixed so the monthly repayments are consistent throughout the loan period.
Cons:
- Large loans often require a form of collateral that needs to be tied to it.
- Loans are fixed, not flexible. You pay interest on funds you’re not currently using.
- Cash flow issues can disrupt your ability to pay on schedule.
- There is a charge if you want to pay your loan earlier than what is stipulated in your contract.
When a Bank Loan is Not an Option
Small and medium-sized businesses that suffer from losses and low credit scores may need to consider other viable financing options. Cross out the option for a bank loan because it will likely get declined.
Bank loans aren’t always the best solution if you need money to fill in small financial gaps in your business, like paying rent, utilities, other overhead expenses, and payroll. The funding could take weeks, and the obligation to pay should be at full term.
On the other hand, other financing options might work for you as an alternative. Invoice factoring finance companies have been a growing solution to fix financial challenges like the ones mentioned above.
What is a Factoring Company?
Top-rated factoring companies, like Factoring Express, provide an alternative funding solution to businesses across different industries—staffing, merchandising, and trucking companies, etc. Factoring is when a business sells its outstanding invoices to a third party, often called a “factor,” to get immediate funding. The factor advances cash worth approximately 70% to 95% of the invoice value.
Upon selling the invoices, the business transfers the risk and obligation to collect payment to the accounts receivable factoring company. Once your client pays the invoice, the company responsible for factoring accounts receivable will give you the remaining invoice value minus the factoring fee.
This process allows you, the business owner, to immediately get the funds you need without waiting weeks for a credit decision.
Invoice Factoring Advantages and Disadvantages
Like loans and other financing options, factoring company account also comes with advantages and disadvantages. To give you a better view, we’re listing them below:
Advantages:
- Quick and easy approval process. Application for factoring invoices doesn’t include a heavy load of paperwork. The best part is that the approval process is very quick compared to banks. Here, you can get cash available for as quickly as a 24-hour turnaround.
- No collateral is needed. Your invoice already serves as collateral—you don’t have to tie up any asset to access funding.
- No debt to be repaid. Since factoring is not a loan or a debt, no payments will be needed unless you’re under recourse terms and the client fails to pay. This risk is minimized by credit checks done by Factoring Express.
- Flexible financing options. You can sell invoices when you need to, and you aren’t tied to fixed terms for each invoice that you sell.
- No caps or limits. With factoring, you can decide when you want funding and how much invoice value you wish to sell. Unlike a bank loan, where they give you an evaluation and choose how much you can borrow.
- There is no need for a high credit score. Again, your personal credit history is not essential for factoring companies. What they look for is your client’s credit and payment history.
Disadvantages:
- Some factors will require businesses to commit to long-term contracts and high monthly minimums, which reduces funding flexibility.
- If you don’t choose the right pricing model, factoring could cost you more than it should. Partnering with Factoring Express will help you avoid this.
- Customer involvement can be an issue if you do not communicate with your clients beforehand since the factors will be the ones to collect the invoice payment. It’s a good thing that Factoring Express has a professional collections team that observes ethical and friendly processes to ensure your invoices get paid. This way, you’ll receive the outstanding balance while maintaining a good relationship with your client.
Traditional Loans vs Factoring: What is Better for My Business?
The answer to this question is based on your current financial situation. We outlined the pros and cons of both loans and factoring so you can assess which is best for you.
Both the bank and the AR factoring company provide funds and will help your business. The terms that would better fit your needs are up to you and your business’s performance.
Most companies prefer factoring over bank loans because of the issues they face in complying with requirements and the high credit score. If you want interest-free, convenient, and fast funding, you won’t go wrong with factoring companies like Factoring Express.
Why Factoring Express is the Perfect Factor for You
There are many factoring companies in Florida. But before searching for “factoring companies near me” on Google, let’s first look at the qualities a factor must have to be considered as the right partner for you.
Consistent Customer Support
The top factoring companies should have the best customer service. Business owners like you will have questions about factoring, and the best factors should be ready to answer any questions new and old customers may need. Timely responses from their support help you decide better.
Experience in Your Industry
Your business’s unique needs depend on the industry you’re catering to. Because the best way to help you is by understanding what you do, it’s better to look for the best invoice factoring companies with experience helping businesses like yours in the same industry. Factoring Express has been catering to businesses in the transportation, health care, merchandising, staffing industries, and more.
Reputation
You can ask other entrepreneurs in your field if they have experience working with specific factoring companies for small businesses or if they have any recommendations. Another option is to check feedback and reviews, which you can find on various online platforms.
In closing, if you’ve decided to choose factoring invoices as a financial solution, partner with a factor that you can work with long-term. This relationship will be important in the future.
Choose the best factoring company in Hollywood, Factoring Express, to reap all the benefits of quick invoice factoring. We’re offering a 1-week free trial for all new clients like you who wish to experience a 24-hour funding service! Give us a call today to claim this trial.
