Invoice Factoring vs Business Loan

Selling outstanding invoices to a factor (financing company) for immediate cash. Factor pays you upfront (typically 80-90% of invoice value), collects from customer, then pays you remainder minus fee.

• Advantages: Fast approval (3-7 days), based on invoices not credit, no debt created, good for B2B businesses, factor handles collections.
• Disadvantages: Higher cost (1-5% per month), requires outstanding invoices, factor collects from customers, doesn't build credit, less control over customer relationships.

Traditional loan where you borrow funds and repay with interest. Fixed monthly payments, lower rates, builds credit.

• Advantages: Lower rates (8-25% APR), you own the funds, builds business credit, fixed monthly payments, more control.
• Disadvantages: Slower approval (1-4 weeks), requires credit check, creates debt, more documentation.

Choose Factoring if:

• You have outstanding B2B invoices
• You need cash in 3-7 days
• You can't qualify for loan
• You want factor to handle collections
• You don't mind higher cost

Choose Business Loan if:

• You want lower cost financing
• You want to build credit
• You don't have invoices to factor
• You want control over customer relationships
• You can wait 1-4 weeks

Scenario: Need $50,000 (from $60,000 invoice)

Invoice Factoring: Invoice value: $60,000 | Advance: $50,000 (83%) | Factor fee: 3% = $1,800 | You receive: $48,200 | Cost: $1,800 (3.6% of advance) | Equivalent APR: ~43% (if 1 month)

Business Loan: Loan: $50,000 | Rate: 12% APR | Term: 12 months | Monthly payment: ~$4,442 | Total interest: ~$3,304 | Total cost: $53,304

Factoring cheaper if invoice paid quickly (1-2 months). Loan cheaper if you need funds longer term. Factoring cost increases with time.