If you run a business, the chances are you’ve spent a lot of time researching sources of finance.
Because at some point, almost every business needs financial help. Whether it’s at the beginning, as your business grows, expanding into a new market, or for a big marketing push – you will need an injection of cash to help you succeed.
No matter how successful your business is, keeping an eye on cash flow is paramount. When it does become an issue, you’ll need access to cash quickly. Two of the most popular choices for businesses looking for a cash boost, are bank loans and invoice financing.
Both options can be extremely effective at getting you out of tricky financial situations, but they are very different. There are lots of factors that could impact which option is best for you and your business, that is why we recommend that you speak with your accountant first.
To help you, we have looked at both financial options in more detail.
Difference Between Invoice Financing And A Bank Loan
The crucial difference between the two types of finance – is where the money is sourced from!
With invoice financing, you are able to get access to cash quickly, as you own the “invoice asset”. This is money you have already earnt. By selling your invoices to a specialist invoice finance lender, you can unlock the cash tied up in them to improve your cash flow, instead of having to wait on your clients settling the invoice amount.
A bank loan (or business loan) comes directly from a bank (or other similar lending organisation). You may borrow against your business, property, or other assets, but the money you borrow will need to be repaid (with interest).
A bank may cap how much can be loaned to you and may adjust repayment schedules and interest rates depending on your business and current assets, but in effect, you can borrow money that you haven’t earnt yet.
Why Choose Invoice Financing
Arguably, invoice financing gives you greater control over your debt. With invoice financing, you can only raise as much capital as you earn. This means that the more you make, the more you can borrow without ever over-borrowing or running the risk of going into debt. The only cap on how much you can borrow is how much you can earn.
In addition, invoice financing is much more accessible for start-up businesses. You don’t need a year of revenue (or financial accounts) to access money using invoice financing. You also don’t need to prove your business’s credit worthiness. Since you are effectively selling your invoices, all you need are reliable and creditable clients. Therefore, the credit strength of your clients is more important than yours.
Another major benefit of invoice financing is speed. Applying for invoice financing is fast and straightforward, in many cases the approval period is a matter of just a few days. This means if you need access to money quickly, by using invoice financing you could see money transferred into your account within the same week.
Depending on the invoice finance lender that you use, you could get access to cash within a day or two. As an invoice finance broker, the team at Evangate FS have access to multiple lenders so we can offer our customers great rates and quick approvals.
Invoice financing is also incredibly flexible, which is a significant benefit for businesses with cash flow issues. Many invoice financing companies offer variable arrangements, so you can sell invoices as and when you need to.
If you want to commit to regular ongoing invoice financing, you can, but you can also “sell on“ your invoices on an irregular basis to give you a safety blanket when you need it – without the need to run around trying to get external funding in a hurry.
Unlike bank loans, there is no repayment schedule or interest costs and no debt to repay, so you can depend on it when you need to.
Why Consider A Bank Loan
Although invoice financing is a great solution, on some occasions a business loan from a bank is more appropriate.
Bank business loans can be used to raise more significant amounts of capital for long-term investments. If you want to invest in your business to help grow and expand operations, you might need access to an initial lump sum that cannot be raised solely through invoice financing.
The “traditional” approach of applying for a bank loan can help you raise the capital that you need, especially if you are seeking considerable funds.
Banks loans are perfect if you need access to more capital than you can raise by charging clients. Unlike invoice financing, which is capped by the value of your invoices, bank loans can be negotiated based on other assets and guarantees.
Usually, business loans also give you more time to repay the amount loaned. A reputable bank manager should also work out a repayment schedule that suits you and your businesses. Specialist banks understand the complexities of different industries and offer loans that reflect your business lifecycle.
For example, invoice financing generally has a repayment schedule of 30 days, while a bank loan can be paid off over a longer time – months, if not years.
Getting a bank loan should be easy, as high-street banks want to win bank more clients. However, they are being more selective as to who they lend to due to previous loan defaults.
The Cons: What You Need To Know Before You Commit
While both invoice financing and bank loans have many positive aspects, there are drawbacks to each one. You should consider the limitations before committing to one or the other:
- The borrowing amount is limited by the value of receivables
- Potential customer relations issues – as with invoice factoring, the financing company communicates directly with your clients, which can raise trust issues
- If a client doesn’t pay, you are responsible for the repayment and a potential late fee – although Bad Debt Protection is available to alleviate this
Bank Business Loan
- It is easier to get into debt especially if large amounts have been loaned
- Banks can be less flexible with repayment schedules – missed payments can result in fines
- Longer application processes mean access to funds is slower
- Interest is applied to the loan repayments
- More difficult for start-up businesses to get loans approved
- Often requires collateral (assets and/or guarantees) to be secured against the loan
Which Is Better For Your Business?
There are pros and cons to invoice financing and bank loans. Choosing which is better for your business is a personal decision that varies from business to business.
Understanding the pros and cons of each financing solution is essential to selecting which one is right for your business. That is why we recommend speaking with your accountant for advice.
In general, if you are concerned about over-borrowing or are a start-up business owner who needs to raise capital – consider invoice financing before you head to the bank to tie yourself into a long-term bank loan.
Invoice financing also allows you the flexibility to raise capital with lower risk than a bank loan. Our invoice finance companies allow you to try invoice financing for 90 days to check if it suits your business.
Speak to Evangate FS today. Our UK team is happy to supply a free quote or to arrange a trial.
And finally, you might be better off getting a few quotes for invoice financing to evaluate how flexible and affordable it is. After all, if you decide you do need a traditional bank loan, the bank will still be there!