It’s not always easy trying to figure out the right financial product for your particular small business. You will be confronted with the prospect of getting a loan, a cash advance, or maybe an opportunity for factoring. Not all of these are going to be ideal for every situation.

The main difference between loans and these other options.

Cash advances and factoring are not loans. Some companies, especially those more interested in tricking small business owners into making bad deals, will certainly pass some of these off as being ‘loans.’

So, what are loans?

Loans for small businesses will report to the major credit bureaus. They will report the amount of credit a small business received, as well as record payments, whether they are on time or not. A good FICO score is required to obtain a loan from a legitimate company.

With a loan, some or all company assets could potentially be used as collateral, depending on how much is required, the loan agreement, and other factors. Funding for the small business usually takes between 3 and 7 business days upon approval. A small business loan is a better option for companies that are on a solid and stable footing, but are looking for a long-term investment opportunity.

Keep in mind that with a small business loan, a missed payment will likely be reported and recorded on the business’s credit.

What about merchant cash advances?

There are plenty of reasons why a small business could benefit from cash advances. Seasonal businesses, like retail and those operating in a high-tourist destination, may need cash advances to not just to get set up for the new season, but to also make payroll, cover utility bills, purchase merchandise, and much more.

A merchant cash advance is a great solution for those companies that are relatively stable, at least to some degree, but if a business is on a downward trend, sliding toward potential bankruptcy, this is not going to help.

Factoring is more ideal for B2B operations.

Business to business companies may benefit from factoring. For example, if a manufacturing company provides a specific product and has numerous clients purchasing those products, but they only pay their invoices every 60 days, 90 days, or even at a longer length of time than that, it can make it extremely difficult for the manufacturing company to make payroll, pay their bills, and stay afloat.

Factoring is basically an advance on the invoices that are submitted to those other businesses, and the company relying on factoring will submit those invoices to the financial lender in exchange for the advance.

By understanding the differences between loans, cash advances, and factoring, it makes it easier for small business to determine the financial solution that will best suit their current needs and situation.

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