Factoring loans have become a popular alternative funding solution for business owners. It allows businesses owners to secure capital using unpaid, outstanding invoices as collateral. This lowers the barrier of acquisition and offers a more attractive funding solution than traditional business loans issued by banks and other financial institutions. If you’re thinking about using a factoring loan to fund your business’s operations, though, there are a few things you should know. Let’s take a closer look at what is a factoring loan.
What is a Factoring Loan and How is it Used?
Overview of Factoring Loans
A factoring loan, also known as factoring receivables, is a type of funding method in which a business owner uses unpaid customer invoices as collateral under the agreement that he or she will pay back the loan. The business owner still retains legal ownership of the invoices. If he or she fails to pay back the loan according to the lender’s terms, however, the lender may take ownership of the invoices.
Accounts receivables — unpaid customer invoices — are a valuable asset for businesses. Granted, some businesses require payment at the time of delivery of their product or service. In this case, they typically won’t have receivables. For businesses that accept payment after the delivery of their product or service, however, a factoring loan is an attractive funding option.
Benefits of Factoring Loans
Factoring loans offer several benefits for business owners. First, they are easier to obtain than traditional unsecured loans from banks and other financial institutions. Since invoices are used as collateral, less weight is placed on the business’s credit history. Even if a business has bad or no credit, it may still be able to obtain a factoring loan. This is assuming that the business has enough outstanding invoices to use as collateral.
Factoring loans also allow business owners to turn invoices into cash more quickly than waiting for the customer to pay. Rather than waiting 60 days for a customer to pay, a business owner can use the invoice to secure a loan.
Furthermore, approval times for factoring loans are typically shorter than traditional bank loans. It often takes just two to three days for a factoring lender to approve a borrower’s loan application. In comparison, it can take banks 60 to 90 days to approve a traditional small business loan.
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