Invoice Factoring vs Bank Loans: What’s the Difference?

What Is Factoring?

Factoring, or invoice factoring, is a way for you to get cash quickly by selling your unpaid invoices to a third party called a factoring company. Instead of waiting for your customers to pay, the factoring company advances you most of the invoice amount upfront, helping you maintain steady cash flow.

You don’t need to apply for a working capital loan or bank loan, you sell those outstanding invoices to a specialised factoring company. The factor advances you a large portion—usually around 80–90%—of the invoice value immediately. When your customer pays the invoice, the factor remits the remaining balance to you, minus a small fee.

For example, suppose you issue a ₹200,000 invoice to a client with 60-day payment terms. Instead of waiting two months, you sell it for ₹180,000 up front. The factor keeps ₹20,000 as their fee and sends you the final balance once your client pays.

Advantages of Factoring

• Quick Access to Cash

Factoring gives you immediate cash by converting your unpaid invoices into funds. You don’t have to wait for your customers to pay, which helps you meet urgent expenses and keep operations running smoothly.

• Easier Approval Process

Unlike bank loans, factoring approval depends mainly on your customers’ creditworthiness, not your business’s credit history. This makes it easier for startups and SMEs with limited credit records to qualify.

• No Debt Involved 

When you use factoring, you’re not borrowing money or increasing your liabilities. You’re simply selling your invoices, so your balance sheet stays debt-free compared to working capital loans or bank loans.

• Flexible Funding 

Factoring allows you to raise cash as and when you need it. Unlike fixed loan amounts, you can factor select invoices based on your cash flow requirements, giving you more control over your finances. 

• Best for Businesses with Urgent Cash Needs

Factoring works well if your business has pending invoices but requires quick funds to manage payroll, inventory, or new orders. It’s a practical solution to maintain smooth cash flow without waiting for customers to pay.

What Is a Bank Loan?

A bank loan is a traditional way for businesses to raise funds by borrowing money from a bank and repaying it over time with interest. Unlike factoring, where you sell invoices, a bank loan involves taking on debt that must be paid back in fixed instalments.

To get a bank loan, you typically go through a detailed application process. This includes submitting business documents, financial statements, and undergoing credit checks. In many cases, banks may also ask for collateral—such as property, equipment, or inventory—as security.

Depending on your business needs and eligibility, banks offer different types of loans tailored for various purposes. Common types of business loans include:

• Term Loans – Lump sum loans repaid over a fixed period.
  

• Working Capital Loans – Short-term loans to cover day-to-day business expenses.
  

• Overdraft Facilities – A flexible option that lets you withdraw more money than what’s in your account, up to a set limit.

For instance, if you run a small manufacturing business and need ₹10 lakhs for expansion or raw materials, a term loan can help. The bank reviews your credit, financials, and repayment ability. 

Advantages of a Bank Loan

• Lower Cost of Borrowing

Bank loans often come with lower interest rates, starting from as low as 10.75% p.a. This is especially true for businesses with a strong credit profile. Compared to factoring fees, bank loans tend to be more cost-effective over the long term.

• Predictable Repayment Structure

With fixed Equated Monthly Instalments (EMIs), you know exactly how much to repay each month. This helps in budgeting and managing your business finances more efficiently.

• Builds Credit History

Repaying your loan on time improves your business credit score. A strong credit history can help you secure better financing options in the future.

• Suitable for Long-Term Needs

Bank loans are ideal for large capital needs—such as purchasing machinery, expanding facilities, or entering new markets—where structured, long-term repayment is necessary.

• Best for Structured, Long-Term Funding

A bank loan is a better choice when your business qualifies based on creditworthiness and you need a well-planned, long-term funding solution instead of short-term working capital support.

Factoring vs Bank Loans: Key Differences

Whether you choose invoice factoring or a bank loan, the right option depends on your business model, how quickly you need funds, and your ability to handle debt.

Should You Choose Factoring or a Bank Loan?

Here are the main factors to consider when choosing between factoring and a bank loan:

1. Business Size & Credit Score
   

   Startups and small businesses with limited or weak credit scores often find factoring more accessible. Since factoring relies on your customers’ creditworthiness rather than yours, it can be easier to secure funds without the hassle of strict credit checks.

2. Funding Urgency

   If you need cash quickly to manage day-to-day operations or cover immediate expenses, factoring provides faster access to funds. Bank loans, in comparison, typically involve a longer approval process with more paperwork.

3. Type of Expense

   Factoring suits working capital needs like payroll, inventory, or operational costs. For larger investments—such as buying equipment or expanding your business—a bank loan is generally better because it offers higher loan amounts and fixed repayment schedules.

4. Risk Tolerance

   Bank loans come with fixed monthly repayments, which you must meet regardless of your sales. Factoring shifts some risk to the factoring company, as repayment depends on your customers paying their invoices. This reduces your debt burden but can be more expensive.

Conclusion

Choosing between invoice factoring and a bank loan depends on what your business needs most: quick cash flow or long-term funding. Factoring gives fast access to working capital without adding debt, while bank loans offer structured financing at lower costs for bigger investments. Both options have their pros and cons. Take the time to assess your financial situation, growth plans, and repayment capacity before deciding.

FAQs

Q1. Is factoring cheaper than a bank loan?

Factoring usually costs more than a bank loan because you pay fees based on your invoice value, while loans charge interest over time. 

Q2. Does factoring affect business credit scores?

Factoring generally does not impact your business credit score since it’s not a loan. The factoring company evaluates your customers’ credit, not yours, so your credit history remains unaffected.

Q3. What happens if a customer doesn’t pay an invoice in factoring?

It depends on the type of factoring you choose. With recourse factoring, you have to pay back the factoring company if your customer doesn’t pay. With non-recourse factoring, the factoring company takes the loss if the customer doesn’t pay, but this usually means you’ll pay higher fees.

Q4. Can small businesses get bank loans easily?

Small businesses often face challenges getting bank loans due to strict credit checks, collateral requirements, and lengthy paperwork. Approval depends on your credit score, financial history, and business stability.