the cost of factoring compare to that of a bank loan?
If the small business can get a bank loan, they should go that route in most instances. Many factoring prospects apply even while they are in the process of getting approved for a bank loan. Which, by the way, of course, can take months.
This is not the kind of economy where banks are going to sit around waiting to sign off on that loan today. They are going to take months to approve a company. And during that time, that client has to complete his work. It's not like the world stops because the banker is waiting around for more documentation or approval.
The other aspect of spot factoring is that once the factor funds the small business, they are not being put into a contractual relationship with the factor where they must commit for a specific amount of time. They can come and go as they please.
If they want to factor just one invoice and disappear, that's all right. If they want to come and do factoring for three months while the bank is approving a loan, that's all right.
The difference is that with a bank, many small businesses can't get approved. And even if they can, the credit line they can get approved for is not sufficient enough. Bankers work on very strict guidelines. There's no leeway.
Factoring companies can work around their client's box, so to speak, to make it adjust to requirements so the small business not only gets approved, they get the kind of cash requirements that they need.