invoice-factoring

When you need to raise capital for your business, it’s good to know you have so many short-term borrowing options. Of course, for every option, you’ll need to weigh the increased cash flow against the trade-off. Get the facts about how your short-term borrowing options really work.

1) Bank or credit union loan

If you have a good relationship with your bank or credit union – or want to build one – you may consider taking out a loan for short-term financing. The more time you need to pay it back, the more preferable a loan is to simply charging up a higher-interest credit card.

Unfortunately, approval for a loan through a bank or credit union can take some time. So, if you need funds right away, this may not be a viable option.

Using a bank or credit union loan for short-term borrowing means:

  • Typically lower interest rates than a credit card
  • Building a relationship with a lender that can help for future financing
  • Longer approval process than other short-term financing options
  • Approval dependent on credit
  • Taking on new debt

2) Credit card

Of all your short-term financing options, a credit card might feel like the easiest go-to route. Just don’t confuse familiarity with practicality. Credit cards are expensive, with typically higher interest rates than loans. Then there is the risk to you personally – even if it’s a business credit card, you’ll likely have to provide a personal guarantee.

Using a credit card for short-term borrowing means:

  • Quick and easy online application and approval process
  • Immediate access to funds for your cash flow needs
  • Approval dependent on your personal credit or personal guarantee (for business credit card)
  • Interest rates typically higher than a loan
  • Taking on new debt

3) Line of credit

Though it serves a similar purpose to a credit card, a line of credit generally comes with higher limits and lower rates. That said, rates are usually adjustable, so expect interest rates – and the associated cost – to increase. It’s also easy to overspend with so much available credit at your disposal.

Using a line of credit for short-term borrowing means:

  • Typically higher limits and lower rates than a credit card
  • Adjustable interest rates (i.e., potential for increased cost in the future)
  • Relying on credit for an unsecured loan or collateral for loan that’s secured
  • Taking on new debt
  • Potential for overspending

4) Peer-to-peer loan

The sharing economy is all the rage these days, peer-to-peer lending included. Instead of going through a traditional bank, you go through a site like Prosper, Lending Club, or Kabbage where they match borrowers with lenders, usually at lower rates than traditional loans.

Of course, you must still go through the application process, for which you’ll likely have to rely on your personal credit history. Plus, even though it’s a peer lending you the money, your experience will likely be limited to your interaction with the lending platform.

Using a peer-to-peer loan for short-term borrowing means:

  • Lower rate than a traditional bank loan
  • Quick and easy online application and approval process
  • Relying on your personal credit for approval
  • Taking on new debt
  • No way of building a relationship with your peer lender

5) Friends and family loan

If there’s anyone you can count on to help you out in a pinch, it’s friends and family. The question is, how will borrowing money from them affect your relationship? Will owing them money make things awkward? And what if you can’t pay them back?

Using a loan from friends or family for short-term borrowing means:

  • No approval process
  • Immediate access to funds for your cash flow needs
  • Potential damage to the relationship

6) Savings

It’s there for a reason but is this the right reason, especially with so many other short-term financing options. You’ve worked hard to build up savings and replacing it will not be easy. So, consider it carefully before dipping in and regretting it later.

Using savings for short-term financing means:

  • No new debt
  • Immediate access to funds for your cash flow needs
  • Depletion of savings for future emergency expenses

7) Invoice factoring

If you have unpaid invoices, you may already have all the financing you need. You just don’t have it yet. Invoice factoring bridges the gap.

A factoring company, like Interstate Capital, purchases your unpaid invoices then collects on your behalf from your customers. You get an advanced lump-sum payment up to 90 percent, then the rest of the invoice amount once it’s paid, minus the factoring fee. What you do have to keep in mind is that the amount you’re advanced depends on several approval variables, including your customers’ credit.

Using invoice factoring for short-term borrowing means:

  • No new debt
  • No limit on how much you can finance
  • Approval dependent on your customers’ credit, not your credit
  • Decision within 1 or 2 business days of application
  • Upon approval, immediate access to funds for cash flow needs
  • Advance of up to 90 percent, dependent on several approval variables
  • Building a relationship that can help for future financing
  • Help collecting on your invoices
  • “Repurchasing” invoices not paid by customers within 90 days (unless non-recourse applies)
  • Factoring fees

Though there is something to appreciate about each of these short-term financing options, invoice factoring just edges out the competition. Yes, it comes with fees, but it’s hard to beat the benefit of having no limit on how much you can finance, with your own money.

Contact Interstate Capital for a factoring rate quote today.