What is the Difference - Line of Credit vs. Invoice Factoring
If you’re a general contractor looking for business financing, you’ve probably found that there are a variety of options available to you. Two of the most popular products available are either a line of credit or invoice factoring.
In this post, we will take a look at the difference between the two and how they can be a great way to get financing for your construction business. By going over how these products work, you will be better able to assess what option would be best for you and your business.
For the most part, invoice factoring will be the easiest financing option to obtain. It is
available to most companies that work with customers who have good credit. This is a great
option for those who can’t qualify for a line of credit right away.
A line of credit is a loan offered by a bank that can offer your business great repayment flexibility at an affordable rate. If you qualify, this could be the best option for your business. However, lines of credit can be hard to get approved for and are usually only provided to companies with a large number of assets, stable cash flow, and a track record of great credit history.
Understanding Each Product
It is important to know how a line of credit or invoice factoring funding works before considering which financing option is best for you. Oftentimes, construction business owners have a general idea of how these products work but can many times have unrealistic expectations for how much financing they can get. By having a more detailed understanding of how these products work, you can have more realistic expectations about interest rates, benefits, and your probability of getting funded.
What is a Line of Credit?
A line of credit is probably one of the most popular as well as the most misunderstood financing options available. A line of credit is a facility that allows you to draw funds up to a certain amount, known as the credit limit. Drawing funds from your line decreases the funds you will have available to you, whereas paying back the line will increase your available funds. Lines of credit are known as a revolving facility in that you’re able to continually draw from it as well as pay it back frequently.
What is Invoice Factoring?
Invoice factoring, also known as accounts receivable factoring, is a kind of financing that
provides you with a cash advance against slow receivable payments. It is often used by
companies that are in the beginning stages of their development when it is difficult to be
approved for an asset-based loan or line of credit.
An invoice factoring transaction is fairly simple because it is not the same as a loan. Factoring is structured as a sale. It is the process in which you sell your invoices to the factoring company in two installments. The first one can cover up to 85% of the invoice amount. The second installment covers the remaining 15% subtracting the factor’s fee.
While this type of financing is typically more expensive than an asset-based loan or line of credit, getting an invoice factoring line is much easier to be approved for. As long as you have a good invoice history and no encumbrances against those invoices, you should have no problem being approved for this type of financing.
Overall, invoice factoring and a line of credit are two excellent options for getting funding for your construction business. Now that you understand how the process works, you will be much better equipped to take on one or both of these financing options for your construction business. Nationwide Notice can help you with paying general contractors, lien release, construction payment, and change order forms. We specialize in construction payments of all types so you don’t have to. To learn more, click here.