The difference between Traditional Bank Loans and Invoice Financing

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When most companies think of ways to raise funding, the first thing that comes to mind is a bank loan or overdraft. However, there are many other options available that are far more flexible, such as invoice financing. Invoice financing is a type of funding that allows businesses to borrow money against their unpaid invoices. This can be an attractive option for businesses that need cash flow but do not have time to wait for their invoices to be paid.

Some of the key differences between traditional bank loans and invoice financing are:

  • Bank loans are typically secured by collateral or a company asset, property or stock. Invoice financing does not require this type of security.
  • Bank loans have fixed terms and interest rates. You are tied into a longer-term, legally binding debt. Invoice financing typically does not have fixed terms, and the interest rate can vary depending on the lender or indeed how attractive the customer you issued the invoice to is. The rate can also be reduced based on track record – so, the more you trade, the more confident the lender is in you, so they reduce the rate.
  • Bank loans appear on the balance sheet as a liability. Invoice Financing does not.
  • Bank loans are typically for a longer period than invoice financing – usually anywhere from 1-5 years. Invoice financing is usually for a shorter period, such as 30, 60 or 90 days.
  • Bank loans will almost certainly require a personal guarantee from the Directors of the company. Invoice financing usually does not require a personal guarantee.

Both bank loans and invoice financing can be helpful for businesses in need of cash flow. However, it is important to understand the differences between the two before deciding which option is right for your business.

What is invoice financing, and how does it work?

Invoice financing is a type of funding that allows businesses to raise funds against outstanding invoices. These funds can be used for working capital or other business purposes.

This can be a huge help for businesses that have strong customer relationships but may not have the cash flow to finance new orders.

Typically, businesses will sell up to 90% of their invoices to a funder at a discount in exchange for immediate cash. The customer pays the full value of the invoice into a segregated account managed by the lender, and the balance is paid back to the business. This process allows businesses to have quick and easy access to cash, which can be used for a variety of purposes such as expanding their business or covering overhead costs.

Our platform connects you directly with a pool of institutional funders with an appetite for high-quality receivables (like invoices) as an investment asset class. Once approved, your invoice is 100% guaranteed to be sold, and you control the maximum cost of finance.

The duration & quality of the invoice will determine the final cost of finance, so, in many cases, it ends up lower than the maximum cost you agreed.

Also, as you build up a positive track record on the platform, your invoices become more attractive, further driving down the cost of finance.

Unlike other forms of funding, you don’t have to take on additional debt or provide personal guarantees. Also, because we don’t apply restrictive concentration limits – either debtor or geographic – you can access more funding than other providers to fuel your growth.

The benefits of Invoice Financing with InvoiceFair

Invoice Financing is a very dynamic form of business financing that can be put in place in a fraction of the time it typically takes to put traditional business loans in place. There a number of significant benefits of Invoice Financing:

  • You have full control at all times – you decide which specific invoices you want to leverage and when and you can trade as many invoices as you like, whenever you want.
  • There are no debtor concentration limits – Release more funds from your Debtor Book.
  • We are Global – No Geographic limitations.
  • WIP Funded – Confidence to tender for contracts with claims and WIP funding
  • No PG’s – No personal guarantees are required, which are typically sought when securing finance from traditional funders
  • Speed – Funds are released within 24 hours
  • Confidential – Our relationship is not disclosed to your debtors
  • No FX Risk – Multi-Currency funding
  • Simple – Intuitive, easy-to-use platform

Why should you consider Invoice Financing over business loans?

There are several reasons to consider invoice financing. Perhaps the most obvious one is that it can help a business get paid more quickly. Businesses can receive almost the entire invoice amount upfront, meaning they don’t have to wait for customers to pay.

In addition, invoice financing can be helpful for businesses that are unable to get a loan from a traditional bank. Invoice financing companies often don’t require businesses to have perfect credit in order to qualify for financing, they can often be more interested in the quality of your customer. 

Finally, invoice financing can be less expensive than a loan from a traditional bank. Traditional bank loans often come with high-interest rates and fees. Invoice financing, on the other hand, typically has much lower interest rates and fees. This can make it a more affordable option for businesses that need funding.

When should you consider Invoice Financing?

  1. When you need to get paid more quickly
  2. When traditional bank loans are not an option
  3. When you need funding but don’t want to spend a lot on interest and fees
  4. When you want to avoid adding debt to your business or balance sheet
  5. When you want to free up cash flow
  6. When you want to improve your business’s financial health
  7. When you want to take advantage of early payment discounts
  8. When you want to reduce your administrative burden
  9. When you want to improve your customer relationships by not having difficult conversations about payment schedules and late payments.
  10. When you want to access funding faster than the slow process of business loans.

When it comes time to choose between invoice financing and a traditional bank loan, the decision largely depends on what you need from your lender. If you’re looking for a quick infusion of cash to cover an immediate expense, invoice financing is likely to be your best bet. However, if you want more long-term support or are interested in consolidating debt, a traditional bank may be a better option.

Invoice financing is typically best for businesses that have a steady stream of incoming invoices and need quick access to cash. The funds from invoice financing are usually available within 24 hours, making it an ideal solution for businesses that have unexpected expenses or need to make payroll.

It may also be more attractive for fast-growing companies who do not have the financial accounting track record that banks look for in assessing suitability for a loan.

Want to learn more about Invoice Financing? InvoiceFair have a range of innovative business financing solutions. Go to our ‘Solutions‘ section to find out more, or arrange a call with one of our team and they will walk you through the options that are available to you.



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