Bank Line of Credit vs. Invoice Factoring

Sooner or later, your growing company is going to need more cash than it currently has on hand.

• Maybe business is just slow due to economic, industry, or seasonal factors beyond your control.
• Maybe you’re caught on the wrong end of a slow-paying client/supplier relationship.
• Maybe you were forced to absorb unanticipated expenses due to personnel, equipment, or supplier issues.
• Or maybe your quarterly payroll taxes snuck up on you.

Running into a cash flow management crunch doesn’t always mean you’ve done something wrong, but it does mean you have to decide how to get the funds you need – and fast.

Two options available to many business owners are a bank line of credit and invoice (or receivables) factoring. Before you take the plunge into either alternative, make sure you’re aware of what they both can mean to your company.

Bank Line of Credit

A bank line of credit is a source of funding extended to a company to help meet its liquidity needs, and is generally intended as a short-term arrangement. After approval, it can be tapped at the company’s discretion.

Interest is paid only on the funds actually borrowed, although some banks charge fees to establish the credit line and may also require you to pay an annualized fee on money not withdrawn.

Pros

• When interest rates are low, lines on bank credit lines generally follow. If you must borrow money, there are certainly better times to do it than others. Tap your line when money is cheap! (Of course, the reverse is true, too. And whatever the interest rate environment, your company’s credit history will also be a factor in the rate you pay.)
• A line of credit can help solidify your relationship with your bank, and prompt payments will enhance your company’s credit standing.
• The credit line’s convenient, “as needed” status gives your company almost immediate access to funds at any time. You might also eventually be approved for additional funds if you keep your account in good standing.
• Lines of credit are usually unsecured, meaning that company or personal property does not generally need to be collateralized to secure funding.

Cons

• Lines of credit can be tough to obtain, depending on general economic conditions and the commercial lending climate. You’ll have to provide the potential lender with a lot of business, and perhaps personal, financial information.
• Bank lines of credit aren’t necessarily forever. Changes regarding the amount available on your credit line, your interest rate, associated fees, and other matters pertaining to your credit line can be imposed by the bank, and you may not like them.
• Even when interest rates are low, bank lines of credit, over time, can turn very expensive. Much like a consumer credit card, interest charged on outstanding balances can accumulate to substantial amounts of money.
• By definition, a bank line of credit adds debt to your company’s balance sheet. Debt service that hangs around too long impairs your company’s flexibility and ability to grow, and can hurt your ability to service other obligations that would be more beneficial to your company.

Invoice Factoring

Invoice factoring lets you sell your company’s receivables to a third-party, like MP Star Financial for fast payment – often the same business day – in exchange for modest transaction fees. Invoice factoring can dramatically improve your company’s cash flow. Rather than waiting up to 60 – or even 90 – days for payment, factoring can give you access to your funds almost immediately.

Pros

• An invoice factoring arrangement is easy to set up. After some initial paperwork, a factoring relationship can usually be established in just a few business days.
• As a business owner or operator, you know that collecting on receivables is one of your most difficult and time consuming tasks. A factoring program gets you out of the collections business and lets you focus on serving your customers and running your company
• Invoice factoring means no additional debt for your company.
• Factoring finance lets you take advantage of business opportunities on a timely basis. Because you’re not waiting to be paid, you can fund equipment upgrades, purchase materials and supplies, and hire new staff whenever needed.

Cons

• The amount available to your company when you factor an invoice is – necessarily – directly tied to the amount owed on the outstanding invoice. (Of course, any funding arrangement is determined by the ability to repay the amount loaned.)
• The rate your company is charged can be influenced both by your company’s credit rating, as well as that of the companies whose invoices are submitted for factoring.
• You need to use good judgment regarding which invoices are factored. Your fees will increase, at least slightly, the longer an invoice remains outstanding. For this reason, be careful about which invoices you submit to factor. Find more factoring tips here.

For more specifics about invoice factoring, visit MP Star Financial and read our post on How Invoice Factoring Works.

Let MP Star Financial’s invoice factoring services handle your cash flow management concerns. Don’t wait 30 to 45 days for payment.  MP Star Financial can get funds to your account faster. Call MP Star Financial for more cash flow management information at (800) 833-3765, extension 150.