How Factoring Differs From a Bank Loan - Fairbanx Corporation

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Glossary of Terms

How Does Factoring Differ From a Bank Loan?

How Does Factoring Differ From a Bank Loan?

Factoring is not a loan facility. It recognizes that your outstanding invoices for services rendered or products shipped are financial assets. Factoring is the assignment of the accounts receivable.

Funding from a Lending Institution	Funding from a Factor
The amount of loan is normally based on the value of your assets, the financial strength of the business and its ability to repay the loan. Ability to repay the loan is judged based on strict rules of the bank, guidelines as prescribed in the Bank Act and other relevant pieces of legislation.	You receive more funding as your sales increase. Therefore there is no set limit on the amount of credit available. In addition, it is not your ability to repay that is of concern, but it is the financial strength of your customers that matters.
You are responsible for the management and collection of your accounts receivable.	In most cases the Factor works to manage and collect the accounts factored.
The loan is repayable according to a predetermined schedule.	With factoring, there is no repayment required. The factor waits to collect from your customer(s).
The application process with the bank involves an extensive evaluation of the business as a whole.	Opening an account with a Factoring company involves the evaluation of the Accounts Receivable of the business.
It takes weeks to complete the loan approval process. There is always a limit attached to the loan.	To set up an account with a factoring company typically takes only 3 – 5 days. There is no set limit attached to a factoring agreement.
You have to make regular payments on your loan.	You are paid immediately for your invoices and there is no loan repayment required.
You can only use bank credit up to the approved limit, regardless of the pace at which your business is growing.	There are no preset limits in factoring. You have access to unlimited funds. You get more funding as your business grows.
You put up assets as collateral to secure the loan. If you can’t make your scheduled payments you may be forced into bankruptcy.	The accounts receivable is all the collateral you need when you enter into a factoring arrangement.