Which is Better? Invoice Factoring or Line of Credit

It's not unusual for SMEs to reach a point early in the startup stage or as they gain traction, where they experience cash flow problems. Often caused by fast growth, financing can quickly solve cash flow problems.

However, obtaining business financing can be a daunting ordeal for business owners. With various solutions, each with its pros and cons, it's hard to decide the right choice for your business. 

This article discusses two alternatives to cash flow issues; invoice factoring and line of credit. They offer almost similar advantages but can pose disparate impacts on your business's financial future. Read on to compare the two and know which is better for your business. 

What is Invoice Factoring?

Invoice factoring entails borrowing against slow-paying receivables. The factoring company advances cash against the value of your open invoice in exchange for the right to collect against it. The factoring company makes the payments in two installments; 85% once it receives the invoice and 15% once your client pays the invoice in full. 

Pros

• Easy to process and set up

• It simplifies the time-consuming and challenging task of collecting receivables.

• Eliminates the issue of debt for your business

• Let you take advantage of business opportunities on a timely basis.

Cons

• The amount available to your business once you factor in an invoice is directly tied to the amount owed to the outstanding invoice.

• Your business's credit rating and that of the client who submits the invoice for factoring influence the charging rate.

• Your fee increases as long as an invoice remains outstanding.

What is a Line of Credit?

Line of credit is a concept widely known and yet generally misunderstood. A line of credit is an institution, usually a bank, which provides you with funds up to a certain amount referred to as the credit limit. While drawing funds from the line reduces your available funds, paying back the line increases the funds available. As long as you make payments, your business can keep drawing against the line. 

Pros

• When interest rates are low, lines on bank credit lines reduce as well.

• A line of credit solidifies your partnership with your bank, with prompt payments enhancing your business's credit standing.

• A credit line's accessibility gives your business almost immediate access to funds as needed.

Cons

• Tricky to obtain depending on financial conditions and the commercial lending climate

• The bank may impose changes on matters on your credit line as they wish

• Bank lines of credit may turn very expensive even during a low-interest rate climate.

• A bank line of credit automatically accrues debt to your business's balance sheet.

Differences between Invoice Factoring and a Line of Credit

Ease of setup

The factoring setup process is relatively easy if the invoice and your client qualify financially for invoice factoring. To obtain a line of credit, the institution offering it must financially review your business, which could take days or weeks. 

Communication with your client

The factoring company takes over your invoice and all communications with your client regarding payment. With a line of credit, your client isn't involved in the communication at all. 

Cash availability

Factoring dictates that you don't get paid until you've invoiced your client, which forces you to source cash from elsewhere to start your project. You can access a line of credit any time once you establish it.

Credit Limit

With a line of credit from whichever institution, the credit you qualify for depends on your business's credit history and financial statements. For factoring, the credit limit depends on the number of your accounts receivable. 

Bottom Line

While the ultimate financing choice for your business is yours to make, the easier and more readily available option is invoice factoring. 

Crown Financial is in the business of invoice factoring. Contact us to learn more about our invoice factoring packages. 

Who Needs Invoice Factoring Services?

It's frustrating when your business experiences cash flow fluctuations due to payment gaps in the accounts receivables. What that means is, you won't have enough cash to keep your business moving as fast as you would want to. Fortunately, you can take advantage of invoice factoring to get your business back on track. Factoring gives you a cash advance of up to 90% of your original invoice. If your business is in the following industries, then you can benefit from invoice factoring.

Oil and gas Invoice Factoring

Whether you are in a small or medium-sized oilfield business, you can still use factoring to secure financing. Oilfield service factoring ensures you are paid right away. You can extend your credit terms to attract new customers. Here are some benefits of factoring for the oil and gas industry.

• Fast financing: The approval for factoring takes 3 to 5 business days. Factoring companies transform your accounts into cash instantly.

• No maximum financing amount: As long as you have outstanding invoices, you'll get the cash you need. You'll only factor in the clients you want to factor.

• Administrative support: The factoring company will handle the collections, credit reports, and online reporting at no extra charge. You can, therefore, invest in building your client base.

Staffing agencies Invoice Factoring

One of the challenges staffing agencies face is promising to pay workers on a contract basis on behalf of their clients. If you fail to pay the contractors, they will not work. As a result, it affects your client's operations.

When your clients don't pay their invoices for 30 days or more, what do you do? You turn to invoice factoring companies. You'll get the working capital you need by using invoice factoring for staffing companies. You can solve payroll issues, recruitment, and hiring costs by using invoice factoring. Factoring ensures you have a consistent funds flow, which gives you the confidence to bid on larger projects.

Manufacturing Invoice Factoring

Manufacturing companies have to buy large materials, pay overheard and contractors, and rent space. It is also common to offer customers long-term payment plans to remain competitive.

However, manufacturing companies with low cash flow will be unable to offer their customers trade terms. Invoice factoring allows you to continue attracting customers and maintain your cash flows.

Telecom Invoice Factoring

Waiting for 30 days or more for customers to make their payment can be challenging, especially when you have bills to pay. Invoice factoring is an excellent way to get the cash you need faster. Telecom and wireless companies that use invoice factoring don't have to wait for 30-60 days for carriers to make their payments.

You can get 90% of the invoiced amount when the invoice is generated. You can use the cash to meet your payroll, pay your bills and even invest in new resources. Invoice factoring allows you to speed up your cash flows.

Aerospace Invoice Factoring

Aerospace factoring is an excellent way to solve your cash flow problems in the aviation industry. You no longer have to wait for 30 to 90 days to receive payment from your customers.

Invoice factoring allows you to build enough cash flows to meet your customer demands, expand your business and pay your customers on time. The factoring company takes care of the back-office services, including free credit analysis and customer collection. You'll have more time to focus on growing your business.

If you are struggling with cash flow issues, Crown Factoring Services is here to help. We have served several industries and understand what it takes to build a successful business. You'll get your invoice advances in 1 or 2 days. Get in touch with us today to get started with your application process. 

When to Consider Using an Invoice Factoring Company

Businesses that need working capital and haven't been able to secure a traditional line of credit or are having trouble collecting from slow-paying clients should consider invoice factoring.

Invoice factoring is how a company can secure capital for its creditworthy invoices. A factor buys invoices from a company and pays the company at a discount in advance.

Every company must receive payment for goods and services. It's simple at its core, but companies cannot overvalue the importance of ensuring a continuous cash flow. 

The time between invoicing services or goods and the receipt of payment can be challenging, especially for a business lacking adequate operating capital or effective cash-flow management strategies.

Most business owners understand the significance of managing cash flow. An unexpected—and unwanted—dip can force a business to seek immediate help. Knowing when to turn to invoice factoring as a financial solution is just as important. 

Below are common reasons a company should inquire about invoice factoring services.

You're in A Cash Flow Crunch

Cash flow isn't just a metaphor – it is the lifeblood of companies; it gives a business the flexibility to meet unexpected expenses and invest in the future.

There are many ways to improve your cash flow. You can send invoices immediately, offer a discount for early payment, or strengthen your inventory by purging or splurging (if data supports this action). 

Business owners can also get help from invoice factoring. It's not just about acquiring money; businesses can also benefit from reduced borrowing costs by taking advantage of invoice financing. It's similar in some ways to traditional bank loans, except it's cheaper because there's no collateral needed. 

If:

• Capital costs are lower than the cost of borrowing from banks.

• The business needs cash quickly.

• Cash flow is tight, and the company does not qualify for bank financing.

Then, invoice financing can help.

You need work capital, but no bank will lend you money.

Securing working capital is one of the primary reasons companies choose invoice factoring. 

If you need capital for daily operations, your bank may not help you. Even if they do, the process can often be slow and frustrating as it takes time to get approved and then finalized.

Let's say you're a business owner who has just landed a new client with a $50,000 project. If you have no other means of securing financing from another bank or lender, then you must wait until you've completed the project to receive payment from your client. 

If you have to wait for completed projects, your business will have to live off of the cash in your bank account. If your business is like most businesses, you won't have enough money to sustain operations for that long.

Banks know this, which is why they're hesitant to provide short-term lines of credit to new and small businesses.

You need to build and maintain a healthy inventory.

Inventory is a necessary evil. Business owners must have inventory to sell products, but they must also pay for the product upfront; this can cause issues because businesses don't always sell every product they purchase. Having excess inventory on hand can be as bad as not having enough.

You want to finance a new inventory order. You can't afford to tie up all your available capital in inventory purchases. It's vital to save some money every month, but it's also imperative not to let your cash flow become so tight that you miss out on good opportunities.

Trying to finance your growth through traditional bank loans is difficult. Banks rarely lend money for inventory purchases, and if they do, the interest rates are high. 

One of the benefits of using an invoice factoring company is that it allows you to get the cash you need before selling your products. Invoice financing gives you a percentage of what your invoices are worth right away, whether or not you've sold anything. That cash infusion helps to grow your business without waiting for customer payments.

You Need To Make Payroll

There are many reasons why businesses get into payroll crunches. Some problems are temporary, some are permanent, and management mistakes cause others. Here are some reasons that payroll problems can occur: 

• Oversight. Payroll is often one of the last items on the agenda when there is a meeting to discuss business planning for the upcoming month. That means that sometimes payroll gets overlooked.

• Temporary issues. If there is a quick drop in sales or an increase in expenses, payroll may need to be temporarily adjusted until things go back to normal.

• An employee leaves without notification. Sometimes, an employee will quit without giving proper notice and then leave the company holding the bag as far as what they owe in terms of final paychecks or other obligations related to employment, such as COBRA or health insurance costs.

• Bad payroll process. Incorrectly setting up the budget for payroll can cause problems managing the process. The budget needs to be set up correctly from the beginning, with adequate reserves for taxes and other costs of doing business expenses so you can avoid payroll issues.

The ability to recognize the warning signs of a likely payroll crisis will keep your doors open today and provide opportunities for a successful future.

You Want To Take On More Projects

You want to take on more business projects. How are you going to afford all this growth? Invoice factoring can help. Factoring is a simple way to grow your business by tapping into your customers' credit. 

When you accept a job from a client:

• Factor in their invoice immediately.

• Factor the invoice before you do any work.

• Factor it in before you buy any materials or hire any subcontractors.

You can get paid directly after factoring in their invoice, even before delivering the project to them. Use that money to finance the cost of labor and materials and overhead expenses like equipment, insurance, taxes, and rent. 

You'll be surprised how many new projects you can take on when you have that extra cash flow fueling your engine.

Invoice factoring works well for both large and small businesses. For small companies, it's an excellent way to generate immediate capital without having to take on a loan or use existing assets as collateral. For larger companies, invoice factoring provides an efficient means of managing accounts receivable, increasing cash flow, and reducing business costs.

Crown Financial, LLC provides financial flexibility to companies that need it when they need it. Contact us today to discuss how invoice factoring can help your business.

Crown Financial Wins Best Factoring Company for 2022

Crown Financial has been selected as one of FactoringClub's Best Factoring Companies for 2022. Over 100+ Invoice Factoring companies were carefully evaluated based on those who exhibit excellent customer service, value, and integrity.

We’re thrilled to receive this award for the second year in a row! We just try to give the best customer service we can and we love helping other companies grow.

If you're looking for Invoice Factoring services, apply here.

How to Build Business Credit

Access to business financing and credit facilities is essential to startups and established businesses. Establishing a solid business credit helps companies execute immediate and future business plans efficiently.

It's wise to plan and start building business credit early enough to have more time to establish good credit. Borrowing is an excellent option for startups looking to build a strong business foundation and small businesses looking to grow and expand.

Before we talk about building business credit, let's first understand what it is and why it is essential.

What is Business Credit?

It is essential to note that your business has a credit score and report, just like you do. Business credit bureaus like Dun & Bradstreet, Equifax, and Experian record business credit information such as debt payments. Creditors, lenders, and insurers use this information to evaluate your credit or insurance application and business deals. Establishing business credit is also helpful in the following ways: 

• It helps you separate your business credit history from your personal credit history.

• It gives you access to credit facilities.

• It demonstrates separation of business from the owners.

6 Steps to Building Your Business Credit

1.   Choose the Right Business Structure

Choose a business structure that establishes your business as an independent legal entity such as LLC, LLP, or Corporation—registering your business as a legal entity helps separate business financial liabilities from personal liabilities.

2.   Apply for Employer Identification Number (EIN)

The IRS uses your business EIN (Federal Tax ID Number) to track financial transactions for tax purposes. Business credit bureaus also use EIN to record your credit history and keep a credit score. You need this record to qualify and apply for credit facilities.

Your business EIN is also required to open a business bank account and file federal tax returns.

3.    Open a Business Bank Account

Your business should operate a checking account in its legal business name for all business transactions. If you use a business credit card for any transactions, pay the credit card bill from the same account.

4.   Register Your Business Address and Phone Number

This simple step solidifies your business's existence as an independent entity. In addition, you can now register with business directories, which require businesses to have an address and a phone number to sign up. 

Business credit reporting agencies collect information from business directories. It helps to keep up-to-date and consistent business contact information with all popular directories. Some of the most popular directories include Better Business Bureau, Angie's List, and YP.com.

Additionally, a dedicated phone line helps you establish your first trade credit relationship with your phone company. The phone company reports your credit history and helps establish your business credit.

5.   Establish Credit Lines with Entities who Report

Apply for net terms with suppliers and vendors to build business credit. Then, as you buy inventory on credit, your purchases and payments are recorded with business credit reporting agencies. Business reporting agencies use this information to create your credit profile and generate your business credit rating.

It is essential to deal with vendors and suppliers who report to a business credit reporting agency.

6.   Mind your Business Credit

Building business credit follows the same principles as building personal credit. Practice responsible borrowing habits, such as paying debts on time and in full, to improve your business credit score. Note that late payments will negatively affect your business credit score.

Finally, monitor your business credit history for inaccuracies and inconsistent business information. Correct any discrepancies by filing a dispute with the reporting agency involved.

Crown Financial, LLC helps businesses better manage cash flows to boost creditworthiness. The good news is that we do not need a pile of paperwork and tax return records to qualify for our services. Contact us to learn more about how we can help you improve your business credit score.

Invoice Factoring For Small and Medium Businesses

Credit is an effective way to make your products and services more attractive, allowing customers to pay later. It is common to find this practice in purchases involving large amounts of money or long shipping processes.

Well-established businesses can wait for unpaid invoices without a problem. However, small and midsize businesses struggle with cash to cover operational expenses and cannot afford to wait long. The money you get in-house enhances production and product delivery to your customers. Every business requires a flexible payment pattern to compete effectively.

Luckily, savvy business owners use invoice factoring as the most reliable solution in this situation. Let's find out how!

What is Invoice Factoring?

Invoice factoring refers to a method of financing a business to get constant cash flow by selling some of your unpaid invoices to another company offering factoring services. The third-party will provide money to ensure a proper money flow for business processes and stabilize income. The business gets the cash as they wait for customers to pay their outstanding invoices.

The factoring companies offer the business the cash they require almost immediately. Generally, they offer a slice of the unpaid invoice upfront then pay the remainder minus fees after collecting payments from the customers.

In a way, it operates as an on-demand business cash advance for unpaid invoices. If you decide to take an advance for outstanding invoices, you usually pay it for an extra fee after a certain period.

A small business can secure its credit line against unpaid invoices without affecting its relationship with clients through invoice factoring. It also enables them to retain control over their invoices and only borrow from the ones they choose.

Constant cash flow from factoring allows your business to avoid scrambling for money to pay bills. You will have peace of mind when you can get funds immediately with a click of a mouse or phone call.

How to Qualify For Invoice Factoring?

The requirements that qualify your business will be different among various factoring companies. The good thing is that they will not focus on your credit but solely look at your customer's creditworthiness when you submit their invoices. The standard requirements to qualify your business for invoice factoring include:

• You sell on credit terms

• Your company has a stable credit history.

• The buyers generate a turnover of over three million US dollars.

• The business has a turnover of over one million US dollars.

• Have a valid business bank account

• The company has a valid tax ID number

• Personal identification documents for business owners

When you meet the minimum criteria, you can apply for invoice factoring from the company of your choice. The process is straightforward, and you can carry it online. Access the accredited investors ready to offer to fund and send them the necessary details.

The Cost of Invoice Factoring

Invoice factoring is similar to any financial instrument where fees will vary according to the lender you choose to use. However, it is the most affordable form of financing for small and midsize businesses because you are borrowing what others owe you.

To determine your factoring rates, you may need to look at the following factors:

• The number of monthly receivables you wish to factor

• The type of industry you operate in

• The creditworthiness of your customers

• The average size of each invoice you factor

• Length of time customers take to pay

On average, factoring costs fall between 1-5%, depending on the factors above. The volume of invoices you will factor in will largely determine the costs. Larger volumes equal lower fees, and factoring companies also offer discounts depending on volumes.  Contact us at Crown Financial, LLC to learn more about invoice factoring.