Factoring accounts receivable: What makes it better than conventional bank loans?
Factoring accounts receivable: What makes it better than conventional bank loans
?Factoring accounts receivable works for almost every industry. More and more IT consultancies, manufacturing units, retail companies, staffing companies, trucking companies, and health providers these days are looking at factoring invoice receivables for meeting their immediate cash requirements. But what makes it better than conventional bank loans? And, what are the reasons for its increased popularity all across the world? Let us find out.
For the uninitiated, factoring invoice receivable is a quick, hassle-free, affordable, and flexible way of getting access to cash for growing one's business. When a business owner applies for a bank loan, he/she has to go through an extensive process. In addition to providing various papers, the applicant has to show the purpose of taking the loan, get personal guarantee, provide lien assets, and fulfil many other responsibilities. If the loan is approved, the payment schedule and interest rate is decided by the bank.
Factoring accounts receivable on the contrary is a quick and easy process of getting cash. You simply need to fill invoice financing application and send it along with your financial documents to the factoring company. The financial documents are required by the factoring companies to validate the credit worthiness of the accounts receivable sellers, as well their clients against whom the invoices and accounts receivables have been drawn.
If the invoices are credit worthy, they are approved instantly and purchased by the factoring companies. The factoring companies offer instant cash against the accounts receivable at highly attractive rates. There are neither exorbitant interest rates nor unnecessary fees as charged by the banks on factoring accounts receivables. There are factoring companies that offer advance rates up to 99% on accounts receivables.
Once you get the money, you are free to utilize it the way you want. Use it for payrolls, for buying raw material, machinery, for marketing, distribution, or for settling your creditors. The factoring company unlike banks and conventional financial institutions is not concerned with what you do with the money provided by them. Most importantly, you don't have to pledge any securities or assets when you are factoring invoices. You sell your accounts receivable/invoices in lieu of the money offered by the factoring company. In this respect, it is unlike a bank loan.
Given the various advantages of factoring invoices, it comes as no surprise why small and medium sized businesses consider it as the best means for financing their business.
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