The Difference Between a Bank Loan and Invoice Factoring?
Posted on December 11, 2017 in Banking
There's two parts to that question. One is the underwriting process and the other is the relationship process. So what's the difference number one. A loan, you have to have collateral to pledge for a loan. You have to have very good credit score. The company has to have very good credit score you have to be in business for two years. That's the underwriting process of the bank loan. After you get the bank loan you have to commit to making payments for that loan. Regardless if you have cash flow you still have make that loan or otherwise you're going to default.
In invoice factoring it's not a loan. It's an asset that the business already has. And you're selling them on an ongoing basis. And a factoring company is purchasing on an ongoing basis. The factoring relationship is never on the balance sheet as a loan because you have invoices that are pending to be paid and as soon as you sell them to the factoring company it becomes cash. That’s the difference!