article imagearticle image

International factoring vs bank loans: which one is right to expand your exporting business?

As an entrepreneur, one always looks for the best ways to grow your business. However, when you need more capital to reach this goal, do you know how to best obtain it?

Many resources are required to be a successful exporter. The key is to have access to capital to fulfil orders and capture opportunities abroad. If your business needs to pay for operational expenses such as payroll, materials, equipment, or other bills, but your cash flows are currently not where they need to be to grow or even sustain your exporting operations, you have a few options to obtain the needed capital. In this article we will compare bank loans and international factoring and see which is right for your export business.

What is International Factoring?

International factoring is a service that allows you to sell export invoices to a finance company when goods or services are provided in return for an initial advance. Once the factoring company collects the payment from your client (the importer) on your behalf, the remaining funds are disbursed minus a fee. Because the finance company collects the payment in the same country as the importer and it allows your company to have a much smoother exporting process, it’s a great tool used by many exporters for its flexibility and speed.

When are bank loans useful?

The most traditional route businesses can take to obtain funds is going to a bank for a loan. Typically, bank loans operate by loaning money to businesses that offer their corporate or personal assets as collateral in case of nonpayment. This is in stark contrast to factoring because the collateral becomes the invoice itself. Here are some situations where a bank loan might be right for your business.

Your business needs long-term cash or a large sum

If you need capital to invest in new equipment or to expand your facilities, a long-term loan can be a great option, and is sometimes necessary to achieve the growth your business desires. These can be very large expenses, and a loan can be the only option to get your hands on more funds than you are currently invoicing.

You would like the lowest rate possible

If you are in no rush to obtain funding, then a bank loan could be right for you. In general, the approval process and disbursement of funds can take several months, but bank loans can often yield the best rates. Banks are very risk adverse, so their underwriting process is extremely thorough. If you pass their muster, however, you can be rewarded with the cheapest access to capital available.

You are a low-risk business

Banks by in large want to work with very low risk, well-established businesses.  If this describes your business, a bank loan could be the logical choice. This is especially true if you are planning on conducting more local business with the funds you are requesting as this is seen as less risky by banks than doing business in foreign markets. Banks generally have restrictions for how you can use their funds, and the approval process can be made complicated when international business is involved. As a result, it is much easier to be approved for a loan if your business is only looking for local clients.

When is Invoice Factoring useful?

Your business needs funding quickly

Arguably the main benefit for your business is the ability to obtain cash fast. A bank loan can be a lengthy and complex process. By contrast, factoring can help you obtain cash in a matter of days, not weeks. Instead of waiting 30 days or longer for clients to pay an invoice, you can accelerate your cash flows and optimize your business operations by selling an invoice to a factoring company like Cultiva Financial. Because factoring companies collect on your behalf, factoring allows you to dedicate your efforts fully to revenue-generating activities. Additionally, Cultiva Financial underwrites your potential clients to determine if they will be financially responsible, eliminating the stress of late payments since we assume the risk.

You don’t want to take on more debt

For small and medium sized businesses, it is preferable to avoid debt whenever possible because being in debt can negatively affect your credit history. Factoring also helps you stay debt free, because unlike loans, it is not recorded as a liability. Thanks to this, you can use factoring to take care of urgent expenses without going into debt. There are no long-term payments or interest to repay either as you are selling an asset.

You need adaptable funding

Factoring specifically with Cultiva Financial can be very flexible. There is no requirement to factor all your invoices, and you are free to stop or restart using the services at any time. If your company expands and you wish to obtain even more cash after beginning factoring, you can simply factor more and larger invoices to meet your needs. If you outgrow a loan, however, you cannot easily extend your credit, and you might be forced to take out another separate loan to meet demands. If your business deals with considerable seasonality, factoring can supplement periods of the years where cash flows are slower. In addition, you are also not bound to restrictive covenants like you would be with certain bank loans. Some require you to have significant collateral, which is not the case with factoring. Factoring with Cultiva Financial is 100% non-recourse. Additionally, factoring can be used as a supplement to an existing bank loan.

You want to mitigate exporting risk

Factoring can be an excellent way to expand into markets your business would like to export but don’t have the means to do so with current resources. Let’s say you are a manufacturing business in Mexico and would like to export your products to a retail company in the US. It would be financially detrimental for you to risk working with an unknown company and then waiting 30+ days for a payment that might be delayed or never arrive. Factoring can allow you to conduct international business more comfortably since we advance you the funds as soon as they receive your products. Banks, in comparison, are very weary of providing loans for these purposes.

In Short

Cultiva Financial offers its international factoring as a versatile financial solution designed to meet your unique business needs and to better expand your exporting activities.

Interested in international factoring for your export business? Contact us today, and we’ll be happy to help!

Continue reading

Back to blog