Maintaining healthy cash flow is key to the success of your business. However, delayed payments can disrupt cash flow and lead to missed opportunities. Fortunately, there are two popular financing options to bridge the gap and maintain your forward momentum — accounts receivable (AR) factoring and a traditional line of credit (LOC).
There are positives and potential drawbacks associated with each option. Here’s a head-to-head comparison so you can identify the right choice for your business.
What Is Accounts Receivable Factoring?
AR factoring involves selling your outstanding AR invoices to a third-party company at a discounted rate. This provides you with immediate cash while you wait for customers to pay. The factoring company assumes responsibility for collecting payments.
Advantages
Accounts receivable factoring offers the following benefits:
However, some of your customers may not be happy that a third party is trying to collect on their debt. Keep that in mind before factoring invoices.
Disadvantages
In addition to the customer satisfaction issues, there are some other concerns associated with AR factoring, including the following:
Factoring is good when you are in a cash crunch, but it’s not something you should rely on all the time. Instead, consider factoring when you need a fast solution and can absorb the losses created by factoring fees.
What Is a True Line of Credit?
A true line of credit is a revolving loan that allows you to borrow funds up to a preset limit. You can draw and repay funds as needed, giving you flexibility when managing cash flow. You will pay interest only on the amount you’ve borrowed, not on the entire credit line.
Advantages
A line of credit provides:
With a line of credit, you will still handle collections. This means customers won’t be affected by your LOC.
Disadvantages
The downsides of an LOC include the following:
A line of credit can serve as a lifeline when your business faces cash flow disruptions. However, you should carefully consider factors such as the need for collateral and the interest rate to make sure the LOC is a good fit for your business.
Which Option Is Right for Your Business?
Both AR factoring and true lines of credit are viable solutions to address your cash flow challenges. AR factoring is better for tapping into funds fast, but you will have to give up more of your potential profits. A LOC includes stricter approval requirements but can provide a long-term source of funding.
Are you unsure of which approach best supports your growth goals? Contact Barrington Commercial Capital to explore our funding options and keep your business moving forward.
