Debt financing vs. bank loans – How can debt financing be a better option?

Does your business need additional capital? Have you been considering taking out a conventional bank loan or you’ve been considering some alternative form of financing? Due to the stringent rules and regulations of taking out a bank loan, debt financing and debt discounting have gained enough momentum among the other possible financial alternatives.

Receivables financing or that which is most commonly called debt financing has eventually become a worthy source of obtaining working capital for many small to medium size business firms. But before you choose debtor finance as the most feasible option, you should know why it is called the better option than traditional banks. Here are few reasons to take into account.

#1: Debtor financing is convenient and quick

Most of the banks have extremely strict and stringent requirements and they even need tons of document work before approving you the loan amount which makes the entire process lengthy and complex. Sometimes it can take up to several months or weeks for the bank to give its decision. But in case of debtor financing, the funds are given off instantly thereby providing a very quick cash flow. Moreover, if you’re lucky enough to choose a trustworthy lender, you can even take less than a day to get the proceeds.

#2: Increased flow of cash

As compared to bank loans, invoice financing offers a predictable cash source. This kind of cash flow creates increased liquidity and this even allows businesses to cover all sorts of expenses within a pretty timely manner and utilize the proceeds to make the business grow and earn profits. This can all be done without creating any form of debt.

#3: No such limitations and caps

Bank loans usually have a maximum amount which can be borrowed. Whenever you reach the limit for which you have been approved, you will require re-applying in case you need added funds. On the contrary, the funds that you get from invoice finance are related in direct proportion to the volume of sales. The more is the amount of sales that you close, the more will be the invoices which you can factor. With the growth of your business sales, you will get more access to cash via receivables.

#4: Debtor finance is more cost-efficient

Though bank financing is less costly, invoice factoring and discounting include various services which can diminish the administrative costs. Services like deciding credit limits for them, enquiring about the credit health of customers and collecting their accounts receivables are some services which are always included within the fees. When such tasks are done on your behalf, you can create operating efficiencies to save money and time.

#5: There’s less risk

Banks often need the businesses to use not only the assets of the business as collateral but the personal assets too. But when you opt for invoice financing, there aren’t any personal guarantee and hence you won’t have to risk your assets for your business.

So, now that you know that debtor financing is anytime a better option than the traditional bank loans, don’t think twice before opting for the former option.