Working Capital vs Factoring

March 29, 2023 EC Funding

Between working capital loans, factor situations and invoice financing, borrowing money can get a little confusing. Don’t fret, you can get funding and secure the money you need.

What’s more, you don’t have time to learn a bunch of jargon, read definitions of financial products and analyze all of the benefits of different alternative loans if you need cash fast. Quarterly tax payments, payroll or critical equipment purchases are priority.

That’s business: you don’t need to get into a long-term contract just to solve an anomalous cash flow crunch.

Review the Options

Take a step back for an overview of your finances after addressing your highest priority issues. Whether you chose factoring or working capital loans to solve your short-term cash flow problems, it makes sense to understand how each of them works. Equip yourself with knowledge to make a good decision next time.

At times, entrepreneurs open a line of credit to borrow for fast cash to cover expenses or working capital. Some business owners will sell unused equipment or put pressure on accounts receivable.

Most successful business owners do all of the above, and run up against dry spells sometimes. That’s where quick and accessible financial products like working capital loans come in handy. However, all loans aren’t equal, and it’s important to understand the benefits and drawbacks of each type.

What is Factoring

Make no mistake about it: a factor is very similar to a loan. Technically speaking, a factor is a company that’s willing to buy your accounts receivable and convert them to paid bills, for a fee. Basically, they pay a chunk of your money up front.

The money is collected from your client then will return most of the rest of the total invoice amount when your client pays. It’s important to remember these factors are businesses, and every business is set up to make a profit.

How Factoring Works

Factors earn their money in several ways that differ from familiar products, such as working capital loans. First off, the client makes a number of annual or monthly payments. In fact, these long-term contract fees are so important to this type of lending company that they might be reticent to accept clients without at least a year’s subscription.

It may not make a lot of sense to pay a large amount of fees simply to have a single infusion of cash into your company. Many factors also charge for line items like fund transfers, credit checks and so forth.

A major source of revenue in the factoring business is discounts. Don’t let the name fool you, this is actually the amount a factor holds back when they pay you. A higher discount percent translates to a costlier factoring scenario, potentially more expensive than working capital loans.

Two common discount schemes exist. First, an incremental discount that increases with each new month. For example, you might pay the factor 3% of the invoice during the first month, 6% after 30 days and 9% from 60-90 days.

In this situation, costs of factoring a $10,000 invoice (without monthly, annual and incidental fees) come to $900 after just two months. The second common scheme is a flat discount percent, such as 5%, but make sure to take into account any additional fees in these scenarios.

Working Capital Explained

Capital is a general term for the resources necessary to do business. There’s a lot more involved than money. Commonly accepted types of capital are social, human and intellectual. However, sometimes it’s the bottom line that matters: that’s when you can depend on working capital loans to cover your short-term costs such as payroll, outstanding invoices, and that extra needed material to complete a contract.

Working capital, on the other hand, is the cash that keeps your business running. Ideally, you’re free to invest, use and grow as you choose. It’s tough to keep cash on hand when you have to pay staff, keep up with taxes, manage facilities, resolve disputes and pay your bills on time.

That’s especially true in businesses with busy and slow seasons, like food service, real estate or contracting. In fact, even the best-run companies would fail if they didn’t have access to short-term cash flow solutions such as working capital loans.

A Working Capital Loan

Not every client is perfect. Very few businesses find it easy to get the money that’s due to them. However, smart entrepreneurs hold on to the good partnerships in order to maintain smooth cash flow and lower operating costs.

Have good relationships and maintain fast turnaround on your receivables. This will prevent a huge well of backed-up accounts to factor out when it’s time to invest in marketing, buy new equipment, pay taxes or address other operational concerns.

With an organized ledger and a clear goal in mind, working capital loans are a feasible option for you.

Fast Approval

Working capital lenders are a little choosier when lending money. In turn, are more prone to ask a lot of questions. However, the paperwork is light and the process quick. Many people can get access to a working capital loan.

You might be surprised at how much cash you are able to borrow. As far as the process goes, it’s common to have a screening up front followed by a quick approval. Funds can be deposited into your bank account in as little as 24 hours. Lenders who deal with working capital loans fully understand the needs of their clients.

These lenders will go out of their way to streamline the process, explain the products and get business owners the cash they need to compete and grow.

At the end of the day, setting up a good cash flow strategy usually involves some sort of financial product. Choosing which product depends on your business. It’s worth it to consider all of your options.

Working capital loans provide funding for small business regardless of receivables. These programs are often available at much lower APR than factoring: sometimes as much as 50% less. If you have a clear goal in mind, whether you need to address a cash crunch due to seasonal lags in business or get the funds you need to take advantage of an attractive opportunity.

Ask a lender about capital loans. These loans tend to be a much faster turn around than the traditional small business loans. Reach out now to learn more, and to see which product fits your business.

Express Capital Funding is a direct lender who specializes in short-term working capital loans for small business and contractors. Our commitment is to accelerate the growth of small business through lending. Connect with us and learn more.

If you have any questions on how Working Capital can help your cash flow or to learn more, please give us a call at 888-513-9937.