Key Points to Consider When Deciding Between Invoice Factoring and a Term Loan

It is not uncommon for a growing business to find itself short of cash. And an immediate shortage of available working capital does not necessarily mean that the company is in trouble. Indeed, an expanding business may need to buy equipment and raw materials or hire staff to meet the increasing demand.

However, customers may be taking 30 days or more to pay their invoices. So, there may be insufficient cash to provide, purchase or manufacture the products or services in time to fulfill new customer orders.

Businesses often need to bridge the timing gap between purchasing goods for production or resale and receiving cash from customers. And, often, negotiating extended terms from vendors is not an option. So, companies then must look for alternative ways to boost the working capital available to continue the expansion.

Bank loans and invoice factoring are two common ways to inject more cash into a business. But, which of these two financing options would be best for your company? Here are some crucial points to consider when choosing between factoring and a term loan from a bank.

What is a Term Loan?

A term loan is the typical business short-term loan that you would get from a bank. Once approved, the bank will advance you with a fixed amount of money. And you will repay that loan, plus the interest, in regular, equal installments.

What is Factoring?

Factoring is the financing of your accounts receivable (AR). A factoring company buys your sales invoices from you, less a small finance fee. This means you get your money immediately rather than having to wait for 30, 60, or 90 days for the customer to pay.  You also do not incur debt with factoring, so it does not show up on your balance sheet.

Why Do You Need Financing?

Factoring and term loans are not the only financing options available to a business. You also have business credit cards, leasing, and, possibly an additional injection of capital from investors. Each of these options has its advantages and disadvantages. And each is better for financing certain types of purchases than the others. The purpose of the funding will help you decide on the best of the various options for your business.

Leasing, for example, is generally best used for significant capital items, such as equipment and vehicles. And business credit cards are cost-effective when used for smaller items of expense and when the credit card is repaid in full every month. Raising capital from a venture capitalist or new business partner will usually mean a loss of control and a reduction in the percentage of equity owned.

Factoring and term loans are more suited to some purposes than others as well. Bank loans are usually best for one-off purposes, such as acquiring new equipment or funding a large project. On the other hand, factoring is best for reducing the working capital cycle, as mentioned above. And factoring releases the cash tied up in accounts receivables, so it makes cash flow more predictable.

On Or Off-balance-sheet Financing?

Factoring is what is known as off-balance-sheet financing, which is a crucial consideration for most businesses. When you factor sales invoices, the factoring company doesn’t lend you money. Instead, the company buys the invoices from you at a discounted price. So, there is no liability recorded in the balance sheet, hence the term off-balance-sheet.

On the other hand, when you take out a short-term loan, the loan will increase the short-term liabilities on your balance sheet. This increase in liabilities will reduce the liquidity of your business and could affect your ability to secure additional funding later.

Related: Ten Benefits of Invoice Factoring for Small Business


The eligibility requirements for term loans and invoice factoring are very different. When you apply for a bank loan, the bank must be confident that your business will repay the loan. So, a bank will check your business credit rating and require historical accounts and financial projections. A bank may also require collateral against a loan and or a personal guarantee for the business owner.

A factoring company is more interested in the creditworthiness of your customers than that of your business. A factoring company will still want to see that your company is not about to enter bankruptcy, of course. And there may be a minimum value of credit sales invoices required each month. Even so, the eligibility requirements for invoice factoring are far less demanding than those for a bank loan. And, consequently, approval rates for factoring applications are far higher. And a new business will find it far less challenging to obtain a factoring account than a business loan.

Speed of Approval

It can take weeks or even months to get a decision on a bank loan. And, on top of that waiting time, you have the time it takes to prepare all the financial information required to apply for a term loan.

A factoring company may require copies of recent accounts, a list of customers, and some samples of your sales invoices. And you may be asked to provide copies of company registration documents and proof of a business bank account and tax ID. However, it generally takes only five days or less for a factoring account to be approved.

Once approved, the current balance on your accounts receivable, less the factoring fees, will be advanced to you immediately. And then, you will receive an advance on every sales invoice you issue within 48 hours or less.

Related: How Invoice Factoring Can Solve Your Cash Flow Problems


When you borrow with a term loan, you borrow a fixed amount over a specified period. Let’s say you borrow to fund expansion, and the growth continues or increases. In this case, you may need additional funding later. Likewise, if growth slows, you may find you have borrowed too much and you will be paying interest on a loan you no longer need.

Invoice factoring naturally adjusts to the volume of business. If you sell more, the factoring company will advance you more cash.  If your sales volumes dip, your funding will reduce, as too will the cost of factoring.


A term loan will, of course, need to be repaid. The month after you receive the cash from a loan, you will have a new regular payment to make. Factoring is not lending, though, so you will not be required to repay the advances made to your business. Instead, your customers will be settling their debts with the factoring company.

However, most factoring solutions are what is known as recourse factoring. In these arrangements, you will have to refund the factoring provider should a customer fail to pay their invoice within a reasonable timescale. In which case, the amount of the unpaid invoice will usually be deducted from the next advance.


Factoring and bank loans are two very different types of financing. It isn’t easy to compare the cost of factoring against the cost of a term loan on a like-for-like basis. However, contrary to popular belief, the long-term difference in cost between the two is often negligible. And factoring saves money in lower accounts receivable collection costs and increased cash flow flexibility.

Related: 10 Considerations When Selecting the Best Factoring Company for Your Business

The Bottom Line

If you are looking for flexible, off-balance-sheet working capital financing, factoring could be the best option. However, if you need to finance the purchase of fixed assets, a term loan might be more appropriate. In any event, the best approach is to investigate all the financing options first and then weigh the cost and other considerations mentioned in this article.

Your Questions Answered Quickly

Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 800.405.6035 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.

About Universal Funding

Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.


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