Why would a company use factoring, rather than borrowing from a bank?
• Factoring appears to be more expensive than a bank loan, so most companies will try for bank financing first. However, many companies cannot qualify for bank loans for a variety of reasons. Their next choice could be factoring. • Second, even if bank funds are available, a bank loan typically is not good for a new or fast growing company. Most banks approve a fixed line of credit. A new or fast growing company usually utilizes these funds within a short time. Most banks will not consider increasing a new loan for 6 to 12 months. This can stifle the company’s growth. • Third, a bank requires a full personal guaranty for the borrowed funds, and often requires a lien on the business owner’s home. A factor does not require this. The factor looks to the credit strength of your customer for assuring collection, without your having personal liability (except for fraud and misrepresentations).
