Why Should You Choose Invoice Factoring over a Cash Advance?

[Clark]

Every business owner knows how crucial cash flow in a business operation is. Paying the payroll, expenses, and capital purchase to grow your business is paramount and needs finances. If you need more cash for your business, your first thought is going to your bank for financing.

However, your bank may turn you down, but it doesn't mean you give up. On the contrary, it would help if you found other ways to finance your business, such as factoring invoices and cash advances. Read on and learn why you should choose invoice factoring instead of cash advances.

Definition of Invoice Factoring and Cash Advance
It would be best if you learned the difference between the two to understand which is best for your business.
• A cash advance is business funding that your business receives in exchange for a percentage of future sales. It also includes a high-interest rate and additional service fees.
• Invoice factoring is a type of advance based on past sales. It's an advance on business accounts receivables. If your business invoices a customer, a factoring company accelerates your cash flow by advancing the cash immediately. It means that you dint have to wait for longer to receive your money from a customer.
What's the Difference between Cash Advance and Invoice Factoring?
Like the cash advance, invoice factoring is an alternative way to fund your business that is fast. Also, it doesn't have strict requirements for credit approvals of traditional loans. However, some differences make invoice factoring a great choice for your business.
• Fast Access to Cash
Cash advances and invoice factoring are great alternatives to traditional business financing. Each involves quick application and minimum credit requirements, making approvals easier and faster.
However, be on the lookout for the conditions offered in cash advances. In the long run, they may leave your business financially worn out.
• Lower Risk
Cash advances involve more risk than invoice factoring. This is because cash advances look at future sales, while invoice factoring companies purchase your existing invoices. As a result, you get cash based on projections rather than actuals which is dangerous for a business.
If your business's future sales don't meet the projections, you will make huge payments with huge interest rates. Also, the payments may continue for a period beyond your revenue generation.
• Lower Overall Cost
A business owner needs to consider the cost of financing their business. It's best to go for low-cost financing as it will benefit the business long term. Cash advance companies charge you the amount granted and a high-interest rate.
On the other hand, invoice factoring companies only charge a small percentage of the invoice total.
Many business owners need to make tough choices in today's economic world. It's easy to face temptations to make quick decisions when your business needs cash fast. However, it's important that you first understand the difference between invoice factoring and cash advances and which works best for you.
Both options provide fast access to cash, but cash advances are more expensive, making it the last resort for most businesses. Invoice factoring is more affordable and sustainable to increase your cash flow.