As a business owner, you need to know that it’s common to experience cash flow issues. Many times, these issues are due to rapid growth, and often the only way to improve the financial situation is with financing.
The two most common financing solutions are a line of credit and invoice factoring. We will take a closer look at each of these below.
Line of Credit Explained
A line of credit is a lot like a credit card. The financial institution provides you with a credit limit. When you need money, you draw on that line. You are given funds, but your available credit is decreased. When you make payments on the draw, your credit line increases.
A line of credit is based on the three C’s: credit, cash flow, and collateral. It is expected that you have the collateral and cash flow to make payments. There are also contractual provisions you must follow to keep the line open.
Invoice Factoring Explained
One of the major reasons businesses have cash flow issues is because they have offered payment terms of 30, 60, 90 days to their clients. Unfortunately, a business really can’t wait that long for payment- but risk losing clients if they don’t offer these terms.
With invoice factoring, you can sell your invoices to a factoring company. They provide you with immediate payment and they wait for the customer to pay. These are usually done in installment payments. They will provide you with 85% of the invoice upfront and the remaining 15% minus their fee once the invoice is paid.
What’s the Difference?
Below, we’ll take a look at the 8 most important features of financing to see the differences between a line of credit and invoice factoring.
A line of credit is cheaper than invoice factoring
A line of credit is harder to qualify for
A line of credit takes longer for approval
Invoice factoring has flexible limits
A line of credit can be difficult to maintain
Funds are easily accessible in both invoice factoring and a line of credit
Invoice factoring credit limit can be increased quickly
Both invoice factoring and line of credit require collateral
Which one is best?
It’s important to keep in mind that there’s no “perfect” solution. Each of these is good at solving a specific type of issue.
You should consider invoice factoring if your business:
Is growing quickly
Has clients that pay within 60 days
Has/had financial issues
Is unable to produce accurate financial reports
Cannot meet the requirements of a line of credit
You should consider a line of credit if your business:
Can provide timely/accurate financial statements
Can meet the covenants of the line of credit
Has reached growth maturity
Has solid assets
If you are looking for a financial solution for your business, contact BT84 Commercial Capital & Business Solutions. We will be more than happy to explain your options and help you find a solution to fit your needs.