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The difference between loans, cash advances and factoring

Finding the right financial product for your small business is important. However, entrepreneurs should be careful about the financing options they choose for small businesses. Some make more sense to your business than others. Small Business Trends spoke to Hanna Kassis, an expert in Segway Financial on how to differentiate loans, cash advances and small business factoring.

Although sometimes referred to as an invoice advance loan, the name is incorrect.

“The biggest difference is that cash advances and factoring are not loans, although sometimes they are disguised as loans,” says Kassis. The trick for small business owners is to understand how to choose the financial product that works to improve their situation. Choosing the wrong path can lead to more serious financial problems if your small business is struggling to begin with.

here is a graphic showing the advantages of different types of financing depending on the needs of your business:

Small Business Financing Options

When considering your small business financing options, perhaps the most important thing to learn is the difference between loans and advances. How do these two forms of financing compare and which is best for your business.

The difference between loans and advances

Small business loans and FICOs

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

A good FICO score is required. All of your business assets can be used as collateral, and financing typically takes around 3-7 days. Use them when you are on a stable financial footing and looking to grow or develop. Small business loans are a great way to replace outdated machinery and even build a new wing.

Miss a payment on one of them and it’s posted to your business credit. With the other two types, this kind of slippage is reported on your personal credit.

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

These other products have different requirements. A merchant cash advanced is a good product for an emergency financial situation. Factoring is the right tool for matching income and expenses. With the merchant cash advance, cash flow history is required, but your small business does not need to provide collateral.

Small business factoring, on the other hand, requires actual invoices and these receivables and invoices are used as collateral. Hence the reason why this is sometimes called a bill advance loan.

Kassis notes another difference between the two products.

“Businesses eligible for factoring are typically B2B on unfavorable terms,” he says. “This delay in payment may be because the seller is offering it to get a deal or the seller is offering it because they are spending enough money to be able to dictate the terms of the deal.”

Suppose you sell bolts to a manufacturer. They buy in volume and keep you busy, but don’t pay for 30-, 60-, or 90-day terms. Factoring allows you to use an invoice advance loan to help you with temporary cash shortages. Products such as Advance Invoice Loan typically take around 2-5 days to process.

Sending invoices

If you send invoices, you have a wider range of options. These choices are limited for businesses like grocery stores if they accept cash in advance.

“Businesses with invoices will be eligible for factoring, cash advances or a loan,” Kassis said. “Businesses that don’t charge can only get a cash advance or a loan. ”

So here are some more information about the merchant’s cash advance to consider.

Cash advances are the quickest solution to get, but you have to be careful when deciding to go after any of them. There is no collateral required here and the funding time is quick at 1-3 days. However, Kassis is clear that small businesses need to carefully consider why they would need this kind of money before they act.

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

Tote cash advance

However, there is a big caveat to this tote. Kassis explains that it’s a great product for seasonal businesses and restaurants in tourist areas. Both of these small businesses might need some cash before their peak season. It is clear, however, that a cash advance will not stop a decline in business.

“If you’re having trouble, a cash advance will bankrupt you,” he says.

In conclusion, understand what type of financing you are looking for by looking at the different options. In particular, know the difference between loans and advances and which one is right for your business.

So what about the invoice advance loan?

Again, the invoice advance loan is not a loan at all but an advance on future profits reflected in a company’s invoices. So understand these essential differences before deciding on the type of financing you are looking for.