Online Loans Vs. Invoice Factoring

 In Alternative Financing

Access to fast cash is important these days, as more and more businesses seek funding to help them weather the economic downturn. About 70% of U.S. small business owners have applied for government emergency loans such as the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL), and SBA Express bridge loans. But emergency loans are limited, take weeks to process, and will only supplement working capital for a short period of time,  which means that  businesses need to evaluate other alternative lending sources to fill the gaps.

In a previous article, we compared merchant cash advances to invoice factoring to identify the pros and cons for each. In this article, we’ll compare invoice factoring with online loans to help you determine which funding source is best for your business’s cash-flow needs.


What are online loans?

Online loans are a relatively new form of business financing. Many high-profile online lenders, such as Fundbox and Bluevine, have been in operation for less than a decade. In a short time, online lending has become popular among business owners because it’s easier to qualify, the application process is much faster, and funds arrive quickly—sometimes in a few hours.  


The new reality for online loans

The devastating impact of COVID-19 has increased the number of businesses who need to seek out alternative funding. Unfortunately, it has also made online loans harder to access. With businesses struggling to survive, defaults and late payments have risen sharply, which has forced online lenders to drastically reduce the number of loans they issue. Some online lenders, including Kabbage, have stopped issuing new loans completely, and those that are still accepting applications are likely to charge higher interest rates and fees to offset the increased risk.  


Raising cash through invoice factoring

Given the new reality of online lending, every business in need of additional cash should also evaluate invoice factoring as an alternative funding source.

Unlike online lending, invoice factoring is not new: it has helped businesses accelerate cash flow for centuries. Modern-day invoice factoring (also known as “accounts receivable funding”) works by advancing a business up to 90% of the cash value of any invoices it has issued. For businesses that offer their customers extended payment terms or have difficulty collecting payments on time, factoring can dramatically improve business stability and provide fast access to cash that can be used for any purpose the business chooses. 

And while loans can place restrictions on what a business can use the cash for, invoice factoring does not. This gives business owners the freedom to fund operations and initiatives as they see fit without limitations.

While online lenders have been impacted by the economic downturn, factoring companies have not changed their application criteria or limited the number of new clients they accept. As a result, invoice factoring may be a more accessible option for many businesses today.


Online loans and invoice factoring: a side-by-side comparison

Online loans and invoice factoring are both popular sources of alternative funding for business owners who are unable to qualify for traditional bank loans or who want to avoid a lengthy application process. But each funding type offers very different features and advantages.  This chart compares online loans and invoice factoring side by side to help you decide which alternative business funding source is a better fit.

Online Loans Invoice Factoring
Fast access to cash at a high price. Affordable, ongoing access to cash.
Get loan proceeds as fast as 24 hours. Get same-day funding after approval.
Pay high interest rates as high as 80%. Pay discount rates as low as 1%.
Can negatively affect your business credit rating if you make a late payment. Does not affect your business credit rating.
You may need to pay additional fees, including an “origination fee” (an application fee), service fees, referral fees, and late payment fees. Many factoring companies have similar fees, but AR Funding does not charge any upfront fees, including application fees, service fees or origination fees.
Additional services are not included in the fees. Businesses receive funds only. Valuable credit evaluations and collections services are included. This can free up time and relieve stress for the business owner or their staff.
A business credit score of between 530 and 650 is required. No business credit score is required to qualify—just creditworthy customers.
Lender can draw funds against your bank account weekly or even daily.. Factor is repaid when your customers pay their invoices.
Online loans are ideal for companies that:

  • Are willing to pay a premium for fast access to cash
  • Don’t have a high volume of unpaid invoices
Invoice factoring is ideal for companies that:

  • Want to minimize the fees and costs associated with funding
  • Offer your customers payment terms of 30/60/90 or more days

If invoice factoring sounds like a good fit for your business needs, start your application today.

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