Here are a few distinctions to differentiate invoice factoring from a standard bank line of credit. The cost of funds for a line of credit is going to be less expensive versus accounts receivable financing from a factoring company. But the bank is looking for two financial milestones when considering a loan. The collateral – how valuable, how liquid, and then – ability to make payments, ongoing profitability to service the note. The bank more often than not will ask for additional collateral to secure a line of credit, for example, is there any equity in the homes of the business owners. A factoring company never needs to consider this dynamic. With invoice factoring the value of an invoice is the collateral.
The bank requires verification that the business is profitable enough to service monthly payments on any type of loan. This means a couple years of tax returns and financial statements to see historically what level of loan the business can handle. The factoring company is relying on the creditworthiness of the account debtor (the customer responsible for paying the invoice). As long as the work is being done for a customer with good credit, the accounts receivable will get financed.
The bank will only offer a line of credit for an amount within the parameters discussed above, enough collateral with substantial net profit to make the payments. A factoring company will provide unlimited access to funds through the expansion of new contracts which produce more invoices.