There are times when businesses perform below expectations. And this usually includes cash flow drying up. Even worse, the business is saddled with customers who do not pay for their goods or services—or are too slow to do so. Therefore it isn’t surprising that factoring has become more popular in the past couple of decades. In factoring, a business transfers the responsibility of collecting payments from customers for goods delivered or services rendered to a third party. This third party is officially known as a factor or factoring company. Sure, there’s the traditional financing route of going to a bank. However, factoring has several advantages over trying to get a loan from a regular financial institution.

More Favorable Rates:

Factoring tends to be more costly than traditional bank financing. For instance, a business that factors $100,000 worth of invoices per month at 2 percent will pay $2,000 to the factoring company, thus getting a total of $1,176,000 in cash flow for the year when the yearly fee total ($24,000) is subtracted from the yearly invoice total ($1,200,000). On the other hand, getting a $100,000 bank loan with 12 percent APR would cost the business $12,000 in interest, with $100,000 still owed.

Speedier Payout:

Traditional bank financing can take days to weeks to finalize. However, with factoring, the payment is accelerated, since the business would receive the amount owed within 24 to 48 hours of selling the accounts to the factor.

More Attractive Financial Appearance:

Factoring functions as a payment and cash flow solution, not a loan. So, there is no interest fees involved. So, as a result, factoring does not add debt to the balance sheet.

Less Restrictions:

The more the business grows, the more cash advances increases with factoring. Thus the process is conductive to growth and expansion. Although banks can increase the amount of funding to businesses, they might require some negotiation for additional credit.