If you are a small business owner that is looking for a source of cash to fund your payroll, you should explore both a factoring loan and a line of credit as a possible solution. A factoring loan, sometimes also known as factoring receivables, is a type of loan that offers unpaid customer invoices as collateral for the loan. Therefore, if you do not pay back the lender under the terms of the agreement, they are legally allowed to take possession of some or all of your unpaid customer invoices. A line of credit operates much differently than a factoring loan. With a line of credit, you will simply open up an account from which you can draw money up to a maximum amount. Most traditional lines of credit are unsecured, meaning there is no collateral for the loan. You will typically pay back however much you took out under the line of credit plus interest. There are many factors to consider when comparing a factoring loan to a line of credit.
Small Business Lending Options – Which Loan Makes The Most Sense
The first point to consider with a factoring loan is whether or not your business uses customer invoices. Many small businesses require payment upon delivery of a good or service, which means they do not accept customer invoices. Since factoring loans require unpaid customer invoices as collateral, small businesses which do not possess any will naturally be unable to open a factoring loan. If your small business does not have any unpaid customer invoices, you will need to search for another way to fund your payroll.
If your small business does have unpaid customer invoices, there are many advantages to using a factoring loan to fund your payroll. First, they are easy to secure compared to unsecured loans. Since unpaid customer invoices are used as collateral, less emphasis is placed on the business owner’s credit history. This means that even if you have a bad credit score, you will still likely be able to find a factoring loan. Additionally, factoring loans have much shorter waiting periods. If you are in a pinch for a quick source of cash, factoring loans usually take only two or three days to be approved. This is much faster than the sixty to ninety day average approval time for a bank loan.
A line of credit is another option if you are looking for a way to fund your payroll for your small business. One great advantage to a line of credit is that although it operates much like a credit card, it is usually much cheaper to use than a traditional credit card. This is because a line of credit has a lower APR than a credit card. Additionally, a line of credit requires less up front in set up fees compared to a home equity line of credit. Although a home equity line of credit may seem attractive to a small business owner who has a good amount of equity in their home, the set up fees can often deter them. Lastly, a line of credit is great because it can be used very flexibly. You can take out cash from the line of credit whenever you choose, and you have a lot more flexibility in how much you can take out up to the maximum amount agreed upon. This means that you do not have to worry about planning ahead weeks in advance, as you can draw out your money within seconds of when you need it.