Factoring vs. Short-Term Loans

Factoring vs. Short-Term LoansIf you’re reading this content, it might be likely you’re a small business owner looking to secure additional financing. Perhaps you want to expand to another location or up your marketing budget. Maybe you’re having a tough time making payroll this month. Whatever the case, you’ve got options. Today we’ll be talking about the differences between two financing opportunities: factoring and short-term loans.

What is Factoring?

According to Investopedia, “A factor is essentially a funding source that agrees to pay a company the value of an invoice less a discount for commission and fees.” With factoring, the financial provider (factor) purchases your business invoices or accounts receivable and gives you immediate financing based on that income you haven’t received yet. Accounts receivable is any money owed by a customer who made the payment on credit. 

The requirements for factoring vary, but typically the funds are released in about 24 hours. There will also be a fee associated with this sale, one which is determined based on the creditworthiness of the customer responsible for paying the business invoice or accounts receivable. The less creditworthy someone is deemed, the greater the fee the company making the sale will be charged. Factoring is beneficial because it provides near-instant access to cash, helping a business that’s late on payments avoid default.

What is a Short-Term Loan?

A short-term loan is typically given to customers who can’t qualify for a line-of-credit from a banking institution. You get a specific sum of money on loan, and it has a lifespan of between 12-18 months. Like factoring, it’s a great choice if you need quick cash. Short-term loans are required to be paid back monthly plus interest—and as mentioned above, usually within a year. Perfect for start-ups, short-term loans are a good bet if your business doesn’t have enough credit built up to get a line of credit.

It is generally slightly more difficult to qualify for a short-term loan than it is for factoring. There is some documentation you’ll need to provide to secure a short-term loan, including tax returns and balance sheets. Whereas with factoring, as long as you have great invoicing practices and the clients you work with are creditworthy, it’s in the bag.

Use Cases

Consider factoring as your financing solution if you’re looking to cover ongoing expenses, things like payroll or inventory. Short-term loans are good for temporary money needs, such as one-off projects or getting new equipment.

And there you have it! Be sure to check in with our blog, the Financial Pantry, every week for more great content on small business loans, marketing tips, and industry news. ARF Financial offers unsecured bank loans for small businesses, and we’ve been doing it for two decades. We can get you your funds fast—no collateral required. And with fixed payments that won’t increase as your revenue grows, what’s to lose? Interested? Try our free online loan calculator to see how much you qualify for!