Unsecured Business Loans vs Invoice Factoring

Unsecured Loans vs Invoice Factoring = Funding Solutions for Everyone

Alternative Financing 101: Unsecured Loans vs Invoice Factoring for Small Businesses

There are a number of similarities between invoice factoring and unsecured business financing, but also some key differences that could impact whether your company may qualify for one or both services – and which is the better choice to build your company. Before comparing the two, however, it is important to understand what each option provides.

Unsecured Business Loan

An unsecured business loan gives your company a fast infusion of cash without requiring a pledge of collateral for security. Companies working with other businesses or individual customers may apply for an unsecured business loan to cover their operating expenses. Credit lines may be approved for up to 90 percent of your monthly sales, and terms range from 3 to 12 months for most loans. Funds are deposited within 24 hours of approval notification, and lenders collect the principal plus interest by making daily debits from your primary account. Interest rates for an unsecured loan are typically higher than those for secured loans to offset the lack of collateral.

Invoice Factoring

Invoice factoring is a non-borrowing financing alternative for companies that provide goods and services to other companies and need to close the gap between invoicing and payment. In an invoice factoring relationship, the factor will purchase your unpaid receivables and advance 70-90 percent of their value within 24 hours. You can continue operating normally while the factor collects from your customers, and when the invoices are closed you will receive the remaining invoice amount minus a small factoring fee.

Factor Finders Offers Unsecured Loans and invoice factoring options 

Unsecured Business Loans and Invoice Factoring: Which is better?

To determine which funding option is better for your company, consider the following questions:

Who do you bill?

Your customers are the critical starting point for comparing unsecured loans with invoice factoring. Companies that invoice other businesses, such as temporary staffing agencies, may qualify for either invoice factoring or an unsecured loan. However, companies that invoice customers or collect payment at the point of sale are not eligible for invoice factoring.

How long have you been in business?

Start-up companies often have the most acute need for funding, but your time in operation does make a difference. Invoice factoring is an option for otherwise-eligible companies that have issued their first invoice, while unsecured lenders may require up to six months of business bank statements showing regular deposits.

Have you experienced financial difficulty in the last six months?

Both unsecured business loans and invoice factoring are designed to help companies that have difficulty qualifying for traditional business loans. That said, each option has its own requirements for approval. To qualify for unsecured loans, companies must carry a positive balance in their business bank account and show no more than two negative daily balances in a single month.

On the other hand, invoice factoring companies base their funding decisions on the credit strength of your customers. Barring any significant financial issues such as a tax lien, shaky bank statements will not keep you from factoring invoices if you work with reliable customers.

What are your ongoing funding needs?

Invoice factoring is an avenue for sustained funding at whatever frequency your company requires to maintain your cash flow. There is no limit to the number of transactions you can initiate in a given time period. If you are looking for one-time funding, however, an unsecured business loan may be the preferable option. Many unsecured lenders offer opportunities to extend or renew lines of credit should your needs change going forward.