- 11 May
Part 1 - Why Factoring Can Be Better Than A Business Loan
If you are looking for a business loan, you may be interested to understand why factoring can be better than taking out a business loan - before you proceed.
Reasons Why Factoring Is Better Than A Business Loan
These are the reasons why factoring can be a better option for funding your business than taking out a business loan.
Factoring Grows In Line With Your Turnover
When you take out a business loan, it is for a fixed amount and that amount reduces as you make repayments against the loan, over the term of the loan. This continues such that once you make your final payment the loan has been fully repaid.
However, with factoring you receive prepayments against the invoices that you raise. Providing your sales ledger remains at a stable amount, your level of prepayments will remain similarly stable.
This means that whilst the facility is "revolving", i.e. old debts are being paid off a new debts are taking their place, overall the amount of funding can remain very similar to the amount initially injected when you take out the factoring arrangement. This means that you continue to benefit from that cash.
What's more, if your turnover grows and your sale ledger increases, so does the amount of funding that is released. In this way the facility actually grows with your business, unlike a loan.
Factoring Can Be Offered With Poor Credit History
One of the benefits of a factoring facility is that it is lower risk to the lender because they undertake the credit control of your sales ledger. This means that they do you not require the same credit standing as may be required to grant a loan.
As the factor has control of the sales ledger, which is the asset that is securing your facility, they are normally able to take a more flexible approach to the types of business that they will finance.
For example, businesses that are in a CVA, have County Court judgements or similar poor credit history can often access factoring - even though they may have been declined for a regular business loan.
Read: Part 2 of this article.