How Invoice Factoring Can Replace a Line of Credit

Are you looking for a line of credit but have not been able to get one? Or, do you need to increase your business line of credit but your lender is unwilling to do so? These problems are common for many companies that need financing. Fortunately, an alternative solution can provide many of the benefits of lines of credit, and, in many cases, it provides a better solution: invoice financing.

Let’s look at the problem first

Most businesses use lines of credit to finance operations. Basically, when cash is low, they use the line to cover business expenses. Then they replenish the line when cash comes in. This practice is very common for companies with corporate clients. Most corporate clients pay invoices in 30 days, though some take as long as 60 days. This payment delay can create cash flow shortages, especially when a company is growing quickly. The line of credit can be used very effectively to cover these cash flow gaps.

But lines of credit have two problems.

Problem #1: Getting a line of credit can be difficult. Most banks are conservative in their lending standards and have difficult collateral requirements. Obviously, banks want to see growing sales with receivables that can be used as security. They also want to see other assets that can be used as collateral, such as machinery, bank accounts, or real estate. Additionally, your company needs to provide impeccable financial statements and show a track record of cash flow growth. Lastly, institutions often prefer to work with larger companies that need substantial financing as well as other banking products and services.

Problem #2: Even if you get a line of credit, you can still run into problems. Lines often have maximums determined by your collateral at the time of underwriting. This limitation can lead to problems if your needs increase quickly due to sales growth. Most banks are not too keen on increasing a line until it develops a track record of performance – which can take a year or two. And getting an increase on an existing line often requires additional underwriting.

For more information, please read “How do commercial lines of credit work?” and “Invoice factoring vs. lines of credit.”

The solution: factor your invoices

Factoring can provide many of the benefits of a line of credit, but with more flexibility. When you finance an invoice, a factoring financing company provides you with immediate funding that can be deployed to run the business, using the invoice as collateral. The transaction settles in 30 to 60 days, when your client pays the invoice in full. In effect, invoice factoring accelerates the revenues tied to slow-paying invoices.

Key advantages over lines of credit

Invoice factoring has two critical advantages over lines of credit. Qualifying for factoring is comparatively easy. Since most factoring companies view your invoices as the main collateral for the transaction, it’s important to have creditworthy customers; and, usually, you don’t need additional collateral. Also, factoring is available to startups and companies with limited track records. Lastly, factoring can be used in “turnaround” situations for companies with serious financial problems.

A second and more important advantage is that the factoring line is flexible and can grow with your business. The size of the line is determined by the size and quality of your invoices. As a result, the line can grow alongside your sales and increase as needed to support your growth.

Is invoice factoring for you?

Invoice factoring is not for everyone and it can’t replace a line of credit in all circumstances. However, invoice factoring should help if you:

  1. Sell to creditworthy corporate clients
  2. Offer payment terms of 30 to 60 days, and
  3. Can’t afford to wait that long for payment

Get more information

We can provide you with high factoring advances at low rates. For information, get an online quote or call (877) 300 3258.