Invoice factoring · Comparison
Factoring or a bank loan?
They solve different problems.
Bank financing is typically cheaper per dollar when available, but it is slower, harder to qualify for and fixed in size. Invoice factoring is priced higher per transaction, generally funds in days, and is tied to eligible receivables rather than a fixed line, so capacity can grow as eligible invoicing grows. Factoring facilities also generally do not use the same financial covenants found in traditional bank lending. The right choice depends on whether you are solving a timing problem or financing a long-lived asset.
Based in Oklahoma City. Funding businesses nationwide.
By the Hexagon Commercial Finance team.
Match the financing to the problem, not to the headline rate.
The most common mistake in comparing these two products is treating them as substitutes priced differently. They are not. A term loan finances an asset that will produce value over years, repaid over those years. Factoring resolves a gap measured in weeks between doing the work and being paid for it.
Financing a 45 day cash gap with a five year loan leaves you servicing debt long after the gap has closed. Financing a building purchase through receivables would be equally wrong-headed.
Once the products are matched to the right problems, the cost comparison becomes far more honest.
Underwriting: two different questions.
A bank asks whether your business can service new debt. It examines historical financial statements, debt service coverage, tangible net worth, personal credit and collateral the bank can readily liquidate. The decision rests on the past.
A factor asks whether your customers will pay their invoices. It examines the credit quality of those customers, the completeness of the work, the quality of the documentation and whether any competing claim exists on the receivable. The decision rests on an asset that already exists.
That is why a two-year-old company invoicing a national account can be approved for factoring while being declined for a bank line on the same day, with both decisions being entirely rational.
The structural difference banks themselves care about.
Factoring is structured as the purchase of receivables rather than a traditional term loan, so there is no fixed monthly loan obligation to service during a slow month, and factoring facilities generally do not use the same financial covenants found in traditional bank lending.
That matters beyond the immediate transaction. Bonding companies, prospective lenders, acquirers and investors all look closely at leverage and obligations. How any particular facility is reported in your financial statements depends on its structure, so confirm the accounting treatment with your accountant.
At a glance
- Factoring setup
- Typically a few business days
- Invoice funding
- Once approved, eligible invoices can typically be funded within 24 to 48 hours
- Typical advance
- 80 to 90 percent of eligible invoice value, depending on industry, customer credit and facility terms
- Covenants
- Factoring facilities generally do not use the same financial covenants found in bank lending
- Can run alongside a bank facility
- Often, with a lien subordination
- Service area
- Nationwide, from our Oklahoma City office
Side by side
| Invoice factoring | Bank term loan or line | |
|---|---|---|
| Time to first funds | Days | Weeks to months |
| Underwriting focus | Receivable quality and customer credit, plus other factors | Your financials and credit |
| Structure | Purchase of receivables | Borrowing recorded as debt |
| Financial covenants | Generally not the same covenants used in bank lending | Commonly used |
| Fixed monthly loan repayment | ||
| Capacity tied to | Eligible receivables | A fixed approved limit |
| Minimum operating history | Reviewed case by case | Commonly two to three years |
| Cost per dollar of capital | Typically higher | Typically lower when available |
| Pay only for what you use | Partly, unused-line fees may apply | |
| Best suited to | Working capital timing gaps | Long-lived assets and acquisitions |
Questions people ask
We'll tell you if a bank is the better answer.
Book a Cashflow Consultation. Based in Oklahoma City, funding nationwide.