If you have just started a business that requires extending credit to a majority of your clients, then you could have a severe cash crunch from the start itself. You would not only need to bring in additional inventory to cater to your clients' growing needs, but you will also need to wait for the due date to arrive, in order to collect your clients payments.

The credit period extended to your clients could curtail your ability to pay your suppliers and employees and also restrain your expansion plans to a great extent. In order to fill your cash counter during this interim period, you need to either raise cash by availing a bank loan or you could tie-up with a business factoring company.

For all practical purposes however, a business factoring company scores heavily over a bank loan. A bank loan would require you to arrange sufficient collateral without which the loan would just not be possible. A factoring company would not require any collateral. You would also need to provide the audited financial statements of the previous 3 years to your bank including your profit figures. This could be difficult or even impossible, if you were to start up a company that had not even reached the break-even point. On the other hand, a factoring company would only require a list of all the credit clients that need to be factored. Since their credibility is even more important than your own, then you could save a lot on your factoring fees, if you have a solid and reliable client list.

A bank loan will only deliver a lump sum amount into your account, which will need to be paid back along with interest over a fixed period of time by way of fixed monthly installments. Thus, a bank loan has many fixed parameters and in case you require additional money during the loan period, then it would be very difficult to raise it. However, since business factoring only depends on the total value of invoices that you sell to the factoring company, it is a much more flexible way to virtually get money into your cash counter.

Business factoring also provides an additional service that banks can never provide. They can take over your collection service and can follow up with your clients to collect the outstanding dues. This service could relieve you of your daily stress that is associated with running after your clients to collect your money. You could redirect your energy and your employees toward more constructive tasks such as increasing your sales.

A bank would concentrate on only getting the loan back along with interest. Thus, if you falter after taking a loan, the bank could even seize your collateral, in order to recover their lost money. The thought of such a possibility itself could unnecessarily add stress to your start up business. A business factoring arrangement does not put any pressure on your mind, since everything depends on the invoices that you factor to the factoring company. If you sell more invoices to your factoring company over a period of time, then you could also negotiate a lower factoring fee, as time goes by.

Thus, a business factoring arrangement provides much more flexibility as compared to a bank loan. The various services offered by business factoring easily scores over the fixed nature of a bank loan.