Factoring vs. Bank Loans

Factoring is a unique type of financing.  “Niche” or “specialty” financing are terms that come to mind.  What it IS NOT, however, is well understood.  Many times I will have a conversation with someone who compares it to a bank loan.  “You loan money on receivables, right?”  “What is your interest rate?” ”Factors are lenders of last resort.”  Unfortunately for the factoring industry, these questions and statements display the misunderstandings people have about factoring.  This post is an attempt to clear up those misunderstandings.

So, how does IFG’s factoring differ from a bank loan?  Let’s start from the top.

1.  Submitting an Application

Most banks require that a company have at least 2 or 3 years of business financials and tax returns before considering them for a conventional loan.  If a company doesn’t have this kind of history, the application process may be cut short right here.  Factoring companies, on the other hand, are looking for accounts receivable, and are not overly concerned with the length of time a company has been in business, just the quantity and quality of the companies invoices.

2.  Increasing the Funding Amount

When a company is growing and is looking to increase its bank line of credit, it will often times have to reapply to the bank for additional approvals.  This process can take weeks (or months!) to complete.  However, once a company has established an IFG factoring relationship, additional funds are easy to come by.  In fact, because receivables typically increase as a company grows, and IFG funds a percentage of those receivables, a company’s “credit limit” automatically increases as well.

3.  Repayment

Loans are typically paid back on a set schedule, usually monthly or quarterly.  This schedule may or may not correspond to the exact times cash is received in a business.  For example, if a client borrows $100,000 for 30 days, and the client’s customers pay on 45 day terms, there is a good chance the client will not be able to pay back the loan.  On the other hand, a client’s customers are actually paying IFG, and thus there is no hard and fast due date that might cause a client to default on the financing.  IFG is paid when the customer makes payment, not on an arbitrary date.

 Hopefully this post highlighted a few of the major differences between Factoring and Bank Loans. 

This entry was posted on 20. October 2009 at 21:39 and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or trackback from your own site.

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