Loans, Overdrafts or Factoring

Financing your business: loans, overdrafts or factoring?

If you´re looking to launch a company or expand your operation, you´re likely to be considering various business finance options.

Business loans, business overdrafts and invoice factoring all provide funding for your next move, but choosing which is most suitable for you can be tricky.

The right solution will depend on your objectives - such as recruiting more staff, raising market awareness or increasing your output.

Factoring vs business loans and overdrafts

While business loans offer the advantage of a lump sum for immediate investment and business overdrafts help bridge financial gaps, factoring can help provide a steady and reliable cash flow.

Factoring with a UK finance provider involves selling your invoices in return for an advance of funds up to a percentage of the invoice value, often within a very short timeframe.

This offers a number of advantages over business loans and overdrafts.

Flexible borrowing

Taking out business loans or arranging business overdrafts allows you to borrow a fixed amount. If you reach that limit, you´ll then need to renegotiate with your lender. Borrowing against your invoices through factoring is a more flexible approach in that as your sales grow, so can your business.

Quick access to funds

Even once arranged it can be a number of days before funds from business loans or business overdrafts appear in your account. A factor company can provide funds within 24 hours of invoices being issued.

Outsourcing credit management

A factor company will offer the opportunity to outsource your credit management function. This allows you to focus on generating more sales rather than chasing payment, a luxury not afforded by conventional business loans or overdrafts.

Issues to bear in mind

While engaging a factor company does offer many advantages over business loans, business overdrafts and other finance options, there are things to think about.

For every invoice issued, the factor company will take a percentage of its value.
If you do choose to outsource credit management, there may be an additional fee.
It's still important to take out credit protection - although the factor company will fund your invoices, you will still be liable for bad debts should the payees not settle.

Borrowing to finance your business through stages of growth can be achieved in a number of ways, all of which have their advantages and disadvantages.

Whichever you choose; taking out business loans, arranging business overdrafts or engaging a factor company, it´s important to consider what's right for your objectives.

Interested in factoring?
UK-based businesses seeking flexible finance can find out more about factoring from Lloyds TSB Commercial Finance

Get an instant quote

Lloyds TSB Commercial Finance Factoring Guide