Factoring or accounts receivable financing is a funding alternative that provides businesses with immediate access to cash by selling their invoices to a third party. A bank loan, in addition to providing liquidity, is also a financial vehicle that contributes to business growth.
When in need of working capital, businesses will likely turn to accounts receivable financing and bank loans as possible funding alternatives. How to choose between factoring and bank loans? To identify the most advantageous option, a business should consider the following:
Factoring vs. Bank Loan: Main differences
- Indebtedness: In finance, loans are recorded as debt, which could affect a business’ credit history. In factoring, it is not.
- Debt backing: Factoring does not request personal guarantees since they are non-recourse financing to the client, while financial entities, such as banking, require personal guarantees from shareholders.
- Payment capacity: When selling an invoice, unlike a lending institution (banks), the loan is based on the debtors’ ability to pay, not the business.
Which alternative suits best for your business?
In order to determine which financial alternative is best for a company, a business should consider the following:
1. Identify financial capabilities
Learn the details of the company’s expenses, costs, and revenues. Similarly, understand its necessity for cash. If the need for funding is specific, factoring, and loans may be a viable alternative in the short term. However, when the need remains constant, it is recommended that the company re-evaluate its financial strategy.
2. Understand financial needs
In order to understand the amount needed for a company to meet its financial obligations, it must first determine its optimal capital structure.
It should be noted that although there is no single metric that measures a company’s debt capacity, analyzing its cash flow and EBITDA can be a key starting point.
3. Optimize expenses
Expenses may vary depending on the method selected by each company. When choosing a loan option, a company must assume the agreed interest percentage, while in factoring, only a portion of the invoice receivable will be deducted. Optimizing expenses is essential.
For more details on which financial alternative best suits your company, contact our team of experts at [email protected]