Bank loans vs. factoring – an honest comparison

The economic environment we are living in is exceptionally volatile and uncertain. Each day may bring new threats to your enterprise’s survival, as well as growth opportunities. For transport companies like yours, cash-flow is by all means one of the most important topics to keep in mind when taking everyday business decisions.
Changes and challenges often require additional capital and stronger cashflow, which small businesses may not be able to solve immediately.  Today, in Eurowag, we decided to compare two of the most viable options for transport companies to quickly improve cashflow: bank loan and invoice factoring.

1)    Bank loan
The first option is to obtain a ‘traditional’ bank loan. In a business loan, the owner can get the money to maintain working capital and improve short to medium term cashflow. Financial institutions will lend money on conditions that the business owner pays back the sum with an applied interest rate, with interest often depending on the risk profile of your business. A fundamental prerequisite to paying the agreed-upon sum in time. Another possible complication is lending requirements, documentation and approval time.
Many business owners nowadays have also moved from a traditional bank lending to a more affordable peer-to-peer lending model, where you as a company borrow money directly from investors. There are both advantages and disadvantages of such approach – on one hand, funding might take longer to obtain and you will often need to prepare a pitch rather than a traditional package of business documentation.

2)    Invoice factoring
Invoice factoring or account receivable factoring is a second way to finance your transport company quickly.
One of the assets of the business is known as an account receivable, which consists of debts that are owed to a company. Factoring companies are purchasing those debts (invoices) on a discounted price in exchange for the immediate payment. Basically, factoring is solving the cashflow problems caused by slow-paying customers or long-term transactions. Historically, banks have been more reserved or charging heavier factoring commissions to the transport companies. However, as the economies strengthen, these barriers seem to gradually diminish.

What is the difference:
Fundamentally, a business loan is a withdrawal from a financial institution, where the business incurs debt, while factoring is a transaction, in which the company is selling unpaid invoices. These transactions are recorded very differently on your financial statements.
Furthermore, another difference between factoring and bank/peer-to-peer financing with accounts receivables involves the ownership of the invoices. Banks require you to assign collateral or pledge invoices as collateral for a loan, while under factoring the financial institution is actually buying invoices themselves.
That implies another difference: with factoring, the business owner is freed from chasing customers for their invoices, because is not entitled to the money anymore, which can also help in case of risky customers and to fighting bad debt.
In both of the cases, business owners have to shell out some money. With the bank loan, it is an interest rate, while in factoring it is a difference between the real value of the invoices and discounted price with which you are selling it. Make sure you consider all options on a table before making a decision on how to optimize your cash flow and shop around, as conditions and requirements between different financial intermediaries will differ strongly based on their risk appetite and interest to attract you as a customer.

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