What are the Key Differences Between a Bank Loan and Factoring?

One of the most common questions we get asked is how does factoring differ from a bank loan or another traditional capital source. This is an excellent question and I will answer this by addressing key differences between the two in the short article.

In the simplest sense, the difference between a bank loan and factoring is like “night” and “day”. When a bank or traditional capital source agrees to make a working capital loan to a business, their overriding concern is whether or not they will be repaid. The bank at the end of the day wants the principal amount owed plus the interest charged on their money paid in full.

While perhaps a harsh statement, there can be no question that this is how a loans’ performance is graded or reviewed. Unfortunately, too often an entrepreneurial business needs an entire menu of tools [in addition to the proceeds of a loan] in order to grow and profitably manage their business. A traditional line of credit or working capital facility typically does not include many or any of the other tools very much needed by the entrepreneur.

In contrast, a relationship with the right partner in the factoring business can not only reward the entrepreneur the working capital needed to expand and succeed but should include an entire menu of other “backroom” services on an evergreen basis. These services that support the business allow the entrepreneur to focus their time and talents on managing and growing the business and not be bogged down on time-consuming, tedious, or distracting tasks.

What are some of the other services an entrepreneur should receive as part of a turn-key relationship with a factor that is not commonly included as part of a working capital line or loan from a bank? I will focus on just the partial list of the additional professional credit and monitoring services our firm provides at no additional or incremental costs to our clients nationwide.

When an entrepreneur has a factoring firm as their partner, they should be able to outsource some or all of the key credit functions including the following to the factor:

  • Assessment of debtor credit and solvency risk
  • Make the credit decision granting decision, with regard to credit terms and credit limits
  • Collect Accounts Receivable as they become due
  • Monitor, track and communicate when needed on unpaid Accounts Receivable
  • Monitor debtor behavior and compile information for reporting
  • Bear the risk of default or bad debt
  • Fund the investment in Accounts Receivable
  • Acquire and monitor Credit Insurance coverage

In almost every case, the factor has access to better and more up-to-date credit information and tools than an individual business would have. In addition, the costs related to establishing and providing common credit tools [research reports, credit insurance, and the like] can usually be purchased on a much more cost-effective basis by a factor than the individual business owner could.

If you’re looking to improve working capital, UC Funding can help answer any questions you have. Contact us today and improve your cash flow today!