Whether it’s a small business or a larger corporation, there will always be times when a business may face a cash crunch. In these situations, the business needs to raise funds to keep the operations running. Invoice factoring and overdraft are two common options businesses can consider in such circumstances. But which one is best?
What is Invoice Factoring?
Invoice factoring is a financial process that lets businesses sell their unpaid customer invoices to a financing company or a third-party financial institution known as factor.
The factor buys your unpaid invoices, pays you upfront, and then collects the invoices from your clients in exchange for a small fee.
This way you don’t have to wait weeks (or even months!) for your clients to pay you.
In general, factoring is a great way for a business to remedy any cash flow issues because it provides immediate funds to invest in day-to-day operations or to invest in other areas of the business.
What is Overdraft?
An overdraft is a credit facility offered by a bank or financial institution that allows a business account holder to overdraw their account when it runs out of money.
The amount of overdraft available to a business is usually based on the creditworthiness, financial standing, and transaction history of the company.
Overdraft is an option designed to provide some breathing space or a cushion to businesses when they need more immediate funds while keeping their expenses flowing.
However, you should keep in mind that overdrafts are repayable and may carry interest charges.
Difference Between Invoice Factoring and Overdraft
The choice between invoice factoring and overdraft comes down to your business’s needs and financial circumstances.
The fundamental difference between the two is that invoice factoring involves selling invoices to a financing company, and overdraft involves borrowing money from a bank or financial institution.
Overdrafts can be a useful financial tool so long as you have a good credit score and a solid grasp of how the interest can accrue should you fall behind on your payments.
With invoice factoring, on the other hand, your credit score is not as important because you are selling something that belongs to you. This has the added benefit of helping you avoid the risk of excessive debt.
Wrapping It Up
Invoice factoring and overdrafts can be a lifesaver when your business experiences a shortfall in cash flow. In deciding which option best suits your business needs, consider your credit score, the size of your business, the risk you are willing to take, and the costs of the financing option.
For businesses that have reliable customers, lack a solid credit history, or just want to steer clear of debt, invoice factoring may be the better option.
At the end of the day, it’s all about recognizing what each option is designed to accomplish and choosing the one that best suits your business needs.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.