Invoice Finance vs Term Loans – The Basics
Success in business is often determined by one simple factor: cash management. The truth is, many businesses fail because they fall short of cash, despite having a good amount of assets and money owed to them by customers. For these reasons, business owners often decide to apply for loans.
Of course, there are many financing and loan products on the market. In this post, we will focus on invoice finance and term loans.
If you have cash flow issues but plenty of unpaid customer invoices, invoice finance may be for you…
Invoice finance is a loan product that allows you to borrow money based on amounts due from customers. A small business may be both profitable and healthy, but it still needs constant cash flow. Credited invoices result in a time gap between a business’ delivery of goods/services and their receipt of payment. In the meantime, the business could have used the payment to start another project or finance their inventory.
Invoice finance bridges the time gap by providing immediate cash up front so a business can continue operations. Depending on the financial institution, a business owner can advance around 80% of his unpaid invoices.
Term loans are a loan option for different purposes…
Unfamiliar with term loans? They’re what bank loans fall under. Term loans are financing products where you get a loan from a financial institution for an amount that has a specified repayment schedule, with either a fixed or a floating interest rate. Term loans are usually repaid monthly from a business’ cash flow.
Generally, a small business will use the cash from term loans to purchase fixed assets such as equipment for the production process. The loan amount and interest rate are generally set by the financial institution’s credit team.
The repayment and fee structures between term loans and invoice finance are not the same. Take the loan products at Funding Societies; repayment on term loans are done on a monthly basis. Meanwhile, invoice finance is repaid on the invoice due date.
If you are a small business looking at loan options, specify why you need a loan. If you need a quick loan for cash flow, invoice finance tends to be a better bet. But if your business is looking to grow and needs money to support its development (perhaps you need to buy equipment to increase production rate or need to pay for expansion plans), then you need to look at various term loan products.
For more on invoice finance, read “The 5 Advantages of Invoice Financing”’