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When Borrowing from a Bank, Be Careful

Bank buildingThere’s little debate that there are stark differences between borrowing money from a bank and raising working capital through invoice factoring. While it’s true that both will generate the cash flow that a business needs in order to pay certain business expenses, a bank and an invoice factoring company have very different overall objectives.

A bank’s goal is to make certain a business loan is repaid in full.

An invoice factoring company’s goal is to partner with a business – and help it grow and succeed.

When a business approaches an invoice factoring company because it wants to know more about how factoring can be a direct benefit, this question often arises: “What exactly is the difference between a bank loan and invoice factoring?” This question simply cannot be answered in a sentence or two. There are many valid reasons that a bank loan might be the best solution for a particular business. However, in many circumstances, invoice factoring is the best possible mechanism to assist in the positive growth and success of a business.

Who “Owns” Your Accounts Receivables?
If you opt for a business loan from a bank, remember this is fact: a loan is a loan. A loan must be repaid, with interest, within a specific time frame. If a bank issues your business a loan, the bank will likely require a first position security interest in all your assets including accounts receivable.

The following is a concise definition of security interest: A legal claim on collateral that has been pledged, usually to obtain a loan. The borrower provides the lender with a security interest in certain assets that can be repossessed if the borrower stops making loan payments. The lender can then sell the repossessed collateral to pay off the loan.

If you elect to utilize an invoice factoring company instead of applying for a bank loan, you are essentially selling your invoices to the invoice factoring company. Once sold, the invoice factoring company gains a first position security interest in the invoices.

This, in a nutshell, is precisely why it is very difficult for a business to elect to open a business loan and also opt for invoice factoring at the same time. Therefore, it is recommended that great caution be taken before choosing a bank loan. A business that is locked into a bank loan has severely limited cash-raising options until the loan is paid in full.

Most Banks Won’t Subordinate to Invoice Factoring Companies
Even if a bank loan is very small, most banks will not subordinate to an invoice factoring company. Subordinating, which means that the bank is willing to put itself at a lower rank than an invoice factoring company, is extremely rare. This reinforces the notion that invoice factoring should be seriously considered before a business makes the decision to open a bank loan or any other type of business line of credit.

Remember, a bank has one concern: it wants to be repaid, in full. Whether or not a business wants to explore the benefits of invoice factoring is not a top priority for a bank – even if invoice factoring will help produce the positive cash flow a business needs in order to stay afloat or even grow and expand.

Bank Loans and Lines of Credit Have Limits
What a business may not realize when it agrees to the terms of a bank loan is that a loan has limits. Once the loan is issued (or a line of credit is maxed out), that’s it. The bank is under no obligation to offer another loan or to increase the line of credit limit. This is a very restrictive scenario, and it can put a business in a tough financial spot with little options. Because most invoice factoring companies are not able to work with a business that already has a bank loan or line of credit in place, this takes the opportunity to factor accounts receivable off the table.

Banks Are Not Interested in Whether Your Business Grows
Banks loan money, and banks want to be repaid – with interest and within a certain time frame. Whether or not a business closes its doors after a bank loan or a line of credit has been paid in full is of very little concern to a bank. While a bank is not vindictive and does not want any business to fail, the ultimate accomplishments of a business makes very little difference to a bank. Once a loan or line of credit is paid in full, the job of the bank is done.

Factoring is Limitless and can Grow as Your Business Grows
14338297_xs_resizedAn invoice factoring company is very different from a bank. An invoice factoring company succeeds when its clients succeed. Therefore, it’s in the best interest of an invoice factoring company to assist in the growth and development of a business that utilizes its services. The relationship between an invoice factoring company and a business is mutually beneficial.

Weigh the Pros and Cons
Before deciding on a bank loan, a bank line of credit or an invoice factoring company for your business, make sure to thoroughly evaluate the pros and cons of each option. Don’t agree to a loan or line of credit before understanding that your agreement with a bank may prohibit you from an agreement with an invoice factoring company until the loan or line of credit is paid in full. It often makes sense to opt for invoice factoring from the get-go because it is a much more flexible, efficient, and immediate method for raising the working capital your business needs.
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Editor’s Note: Greg Curtiss is President of The Invoice Bankers. Mr. Curtiss previously was a lawyer and has passed the CPA exam. He has been in business for over 25 years. You can reach him by calling 303-740-7600 or 1-888-740-1750.