When dealing with cash flow issues, business owners have several solutions to tap. Among these choices are top factoring company account and business line of credit. Financing solutions is not a one size fits all deal and each comes with its own pros and cons.
When you have a growing business, it can be challenging at times to deal with the terms you have given your clients. While you are certain they will send their fees, cash flow can be pretty tight if you have to wait for 30, 45, or 60 days or even longer. When you have demands to fulfill, be it for your operations or for other clients, being cash-strapped is very tough.
Invoice factoring allows you to use your invoices so factoring companies can give you immediate funding. This way you are able to pay your staff, buy needed supplies, avail of services needed, or fulfil the demands of clients. Most factoring companies will give you a revolving line, so you can finance your invoices as needed as long as older ones are being cleared.
Business Line Of Credit
On the other hand, business line of credit works similar to how credit cards work. You will be given by the lender a maximum credit limit which you can draw from when you need extra funds. When you repay what you used, the available credit resets. You will be asked by the bank or other lenders for collateral and make sure you have good cash flow so they know you can pay up.
Factoring vs. Business Line of Credit
Lines of Credit Are Cheaper. As a financing solution, lines of credit could be one of the cheapest you’ll find. You will usually deal with the prime rate plus the incremental portion. Meanwhile, factoring can be expensive when compared to lines of credit but work well if you have a decent profit margin.
Factoring Is Easier To Get. Qualification requirements for factoring and lines of credit are too different worlds. You can easily get funding from factoring companies especially when the invoice used is for a company with good history of commercial credit. On the other hand, you need to deal with strict qualification process for lines of credit. Your business must have a good cash flow and you need a collateral. You must also prove that you are a low-risk client.
Approval of Lines Of Credit Can Take Weeks. Factoring companies can approve your application in a week or two or even quicker. Lines of credit, however, can take several weeks or even months depending on the information you provide the lender and the time it takes the lender to process your application.
Factoring Companies Can Give You Flexible Limits. Lines of credit will have a maximum limit depending on your assets, ability to pay, and cash flow. A factoring line, on the other hand, can have some flexibility as the amount may depend on the receivables from your customers. Asking for increased limit is also easier with factoring.
Again, there is no perfect financing solution. However, if your business is growing and relatively new, you have clients that pay on a regular basis, struggling with certain financial issues, then factoring might be the better solution for your business.
Should you get a business line of credit or should you work with the top factoring company account. We outline the pros and cons for you.