Factoring Versus Overdraft - Why Debtor Finance Delivers the Cash!

What's the difference between a loan and factoring? This article contrasts the differences between these commercial finance options and why debtor finance can offer you the working capital you need.

Getting a commercial loan or overdraft from your bank can prove to be difficult, especially if you are a relatively new business. However, if your company trades with other companies then securing finance to aid cash flow and provide working capital can be achieved with relative ease via a factoring or invoice discounting facility.

The key to understanding why this is so, is to explain the underlying differences between a loan and a factored lending facility.

The characteristics of a Commercial Loan or Overdraft

A loan normally involves two parties i.e. a lender and a borrower. For the lender to offer a loan they need some comfort that the borrower can meet interest payments and ultimately repay the capital. If a lender feels that a borrowing company has insufficient strength to meet their loan criteria then one of the following may occur:-

The loan is offered with a high interest to reflect the perceived level of risk by the lender.
The lender offers a lower amount, i.e. at a level the company can afford .
The loan application is rejected!

The characteristics of a Factoring facility

A Debtor Finance loan facility is quite different, where a Commercial Loan or Overdraft involves just two parties, a Factoring or Invoice Discounting option can involve all the companies who purchase goods or services on credit from the borrowing company. This is the key to securing the working capital.

Why Invoice Finance delivers the cash!

Simply stated, the reason the Debtor Finance option(s) can generate the finance your require, where as a loan or overdraft may not, is risk to any potential lender! Debtor finance options spreads any loan risk between many companies and not just a single business, minimising risk gives a lender comfort and secures the finance your company requires!

For more specific information about Debtor Finance read our factoring and invoice discounting pages, it could just be that these facilities are the answers to your current or future problems.

Summary

This brief article should be of interest to any business to business trading company seeking cash flow or working capital. We explain why debtor finance should deliver the cash you require and why a commercial loan application might let you down.