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• 27 Jul

  Compare A Loan With Factoring Options

  The number of finance businesses that just send out their email marketing to all and sundry, without any opt-in is staggering. It is not just small businesses, we get inundated with multiple email communications, to every email address, from high-profile names that you will be very familiar with - and that should know better than to send unsolicited emails.

  Compare A Loan With Factoring

  I have just had another email from one business loan provider, offering up to £100K, for up to a year, so I had a quick look at their site to compare a loan with factoring. They have, what I must admit, is a very neat calculator that enables you to adjust the time that you borrow for and the amount. When you select a year term, you can effectively see the interest rate that you will be paying on the funds that you borrow. In the case that I was looking at, it worked out at 19.5% per annum! That is purely to borrow the money for a year - that rate was prorated if you change the term to less than a year. Also, that appears slightly lower than the 2% to 6% per month range that they mention on their site.

  It made me look at the comparison with factoring. So taking one of the examples of the cost of factoring from our website, of a 140K loan, the combined charges worked out at about 7.7% per annum of the funds borrowed - so the commercial loan is about 2.5 times more expensive than the cost of factoring!

  The Pros And Cons Explained

  These are the pros and cons of the loan compared with factoring, explained in simple terms:

  • Ease - the loan is easy to understand, you borrow X at a cost of Y for Z months, and pay it back in monthly chunks. Factoring is a bit more complicated it advances a percentage against your sales ledger and it is repaid when your customers pay. As you raise more invoices you get more money advanced.
    
    
  • Speed - the loan site promises a quick decision via an online application within hours. Factoring is likely to take a little longer, we have had deals paid out within a few days where circumstances require a fast response, but it tends to be the customer that drives the speed of the setup with factoring.
    
    
  • Criteria - no mention of the criteria for the loan is made on the site. Factoring is likely to be available to businesses with previous poor credit history, and even those in CVA or with CCJs and prior bankruptcies.
    
    
  • Cost - the loan was more expensive, about 2.5 times more per annum in the example I looked at. However, the 2% to 6% per month pricing mentioned on their site would be even more than the example that their pricing formula uses (which equates to a 1.625% interest rate per month).
    
    
  • Other charges - the loan site promised no additional setup fees or charges. With factoring the tariff of additional charges will vary between providers and facilities. At one end of the spectrum, there are bundled or all-inclusive fees. At the other end, there will be a tariff of charges for additional services that are required e.g. CHAPS transfers.
    
    
  • Repayment - the loan was to be repaid over up to 12 months, with factoring the finance revolves as described above, so in effect, you can hang onto the finance indefinitely, in some circumstances. This post looks at the Comparison Of Funding Levels Between A Loan And Invoice Finance.
    
    
  • Cost Benefits - the loan only provides the money, factoring also comes with a full credit control service that can mean you don't need to pay credit controllers or waste your own time undertaking the task of chasing of unpaid customer invoices. This can create a cost saving from factoring that we have previously compared to overdraft you could use the same model to compare factoring options with a loan.

  By Glenn Blackman