Online business loans vs. factoring

Accessing working capital to boost cash flow or pay off debt can be a challenge for any business. As a smaller company, this can feel especially daunting. When the banks turn down your loan application, where can you go?

Over the past decade or so, a series of online lending platforms have emerged to fill the business funding gap. These tech-driven firms offer companies a simpler and often more accessible alternative to the big retail banks. But, as a company that’s looking for fast, flexible finance, it’s important to understand that online loans are not the only option available to you.

If you deal business to business and sell on credit terms that do not stretch longer than 180 days, factoring may be an ideal way for you to access the capital you need to grow (or survive a cash flow crunch).

How does factoring work?

With factoring, you get a cash advance on money that is already owed to you – yet tied up in your outstanding invoices. Instead of waiting months for your customers to pay in line with the agreed credit sales terms, you can draw the capital into your business sooner. The factoring company pays you up to 75% of the value of an invoice. You then get the balance – minus an agreed admin fee – when your customer settles the account in full.

What’s the difference between factoring and an online loan?

Both online lenders and factoring companies aim to provide you with the working capital you need as swiftly as possible. But apart from this, they are two very different approaches to finance.

Here’s why:

    • Interest rates:

Some online lending platforms charge high interest rates, which can cause you to build up debt quickly. With factoring, on the other hand, you do not incur debt. Rather, you convert your outstanding invoices into cash flow without paying interest on your working capital.

    • Fees:

Some online lending websites automatically deduct fees from your bank accounts or credit cards (sometimes on a daily basis). Factoring companies, however, deduct their fees from your customers’ account payments.

    • Professional support:

Online lenders tend to focus purely on the money. They do not often provide support services to their borrowers. With factoring, the service continues beyond the initial cash advance. This is because factoring specialists manage your sales ledger on your behalf, providing valuable admin and credit control support. You benefit from their professional expertise. You also save hours of time that you can now devote to more important tasks. All this helps to offset your factoring costs.

    • Personalised service:

While online lending platforms offer a digital customer experience, factoring companies develop a personal relationship with clients, taking time to understand your business and develop a factoring solution that matches your unique business needs. It is also in the factoring companies’ interest to support your business growth. Your factoring facility can grow as your turnover grows, which benefits both parties.

Merchant Factors focuses on your business success

Merchant Factors has been helping businesses grow since 1988, when it was founded to offer a fast, flexible alternative to traditional bank loans. Since then, Merchant Factors has helped over 2,000 companies to reach their financial and business goals.

As a specialist factoring company that is wholly independent, Merchant Factors is able to:

  • Tailor its facilities to suit most emerging small and medium size businesses
  • Provide expert, transparent credit control and debtor administration support
  • Offer the shortest turnaround time in the industry from application to pay-out

For fast, flexible business finance – contact Merchant Factors today

Finance beyond the Numbers.