The Difference Between Loans, Cash Advances and Factoring

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Get­ting the right finan­cial prod­uct for your small busi­ness is impor­tant. How­ev­er, entre­pre­neurs should be care­ful about which small busi­ness financ­ing options they choose. Some make more sense for your com­pa­ny than oth­ers. Small Busi­ness Trends talked with Han­na Kas­sis an expert at Seg­way Finan­cial about how to dif­fer­en­ti­ate between loans, cash advances and fac­tor­ing.

The biggest dif­fer­ence is cash advances and fac­tor­ing are not loans, although some­times theyre dis­guised as loans, Kas­sis says. The trick for small busi­ness own­ers is in under­stand­ing how to pick the finan­cial prod­uct that works to make their sit­u­a­tion bet­ter.  Choos­ing the wrong path can lead to deep­er finan­cial issues if your small busi­ness is in some trou­ble to begin with.

Heres a chart show­ing the ben­e­fits of  the var­i­ous types of financ­ing depend­ing upon your busi­ness needs:

The Difference Between Small Business Financing Options

Small Business Loans and FICO

There are some fun­da­men­tal dif­fer­ences. For exam­ple, small busi­ness loans report to the cred­it bureaus about the cred­it of the busi­ness and not the own­ers. These are gen­er­al­ly the way to go when youre look­ing to make a long term invest­ment in your busi­ness.

A good FICO score is required. All your com­pa­ny assets can be used as col­lat­er­al and fund­ing usu­al­ly takes about 37 days. Use these when youre on a sta­ble foot­ing finan­cial­ly and look­ing to grow or expand. Small busi­ness loans are a great way to replace out­dat­ed machin­ery and even build a new wing.

Miss a pay­ment on one of these and it gets report­ed on your busi­ness cred­it. With the oth­er two types, that kind of slip up gets report­ed on your per­son­al cred­it.

Merchant Cash Advances and Factoring: For a Different Set of Business Needs

These oth­er prod­ucts have a dif­fer­ent set of require­ments. A mer­chant cash advance is a good prod­uct for an emer­gency finan­cial sit­u­a­tion. Fac­tor­ing is the right tool to match income and expens­es. With the mer­chant cash advance, cash flow his­to­ry is required but your small busi­ness doesnt need to sup­ply any col­lat­er­al.

Fac­tor­ing, on the oth­er hand, requires actu­al invoic­es and those receiv­ables and invoic­es are used as col­lat­er­al.

Kas­sis notes anoth­er dif­fer­ence between the two prod­ucts.

Com­pa­nies that qual­i­fy for fac­tor­ing are typ­i­cal­ly B2B under unfavourable terms, He says. That delayed pay­ment could be a result of the sell­er offer­ing it to get busi­ness or the ven­dor offer­ing it because theyre spend­ing enough mon­ey they can dic­tate the terns of the deal.

Say youre sell­ing bolts to a man­u­fac­tur­er. Theyre buy­ing in vol­ume and keep­ing you busy, buy not pay­ing for terms of 30, 90 or nine­ty days.  Fac­tor­ing can help you can over tem­po­rary cash crunch­es. These prod­ucts gen­er­al­ly take about  25 days to process.

Sending Invoices

If you send invoic­es, you have a wider range of options. Those choic­es are lim­it­ed for enter­pris­es like gro­cery stores that accept cash up front.

Busi­ness­es with invoic­es will qual­i­fy for fac­tor­ing, cash advances or a loan, Kas­sis says. Busi­ness­es that dont invoice can only get a cash advance or a loan.

Cash advances are the quick­est solu­tion to get but you need to be care­ful when you make a deci­sion to go after one of these. There is no col­lat­er­al need­ed here and the time to fund is quick at 13 days. How­ev­er, Kas­sis is clear small busi­ness needs to take a good look at why theyd need this type of mon­ey before they act.

The cash advance is the catch-all. With about $10,000 a month from any source, you can prob­a­bly get one of these prod­ucts.

Cash Advance Catch-all

How­ev­er, theres a big caveat to this catch-all. Kas­sis explains this is a great prod­uct for sea­son­al busi­ness­es and restau­rants in tourist areas. Both of these small busi­ness­es might need some cash ahead of their busy sea­son.  Hes clear, how­ev­er, a cash advance wont stop a down­ward busi­ness slide.

If youre strug­gling, a cash advance will put you out of busi­ness, he says.

Fac­tor­ing Pho­to via Shut­ter­stock
Chart cour­tesy of

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Charles Milander es un destacado experto en tecnología y medios sociales. Ha sido corresponsal colaborador de CNN Expansion Mercado and Newspaper Listin Diario, productor de TV, presentador y presentador de Univision Radio, Telemundo47, Color Vision. Diseña arquitectura de software, tecnologías de Internet, mercadeo en red, desarrollo de productos.

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