Is Invoice Factoring Better Than an ACH Loan?

An ACH loan is a type of merchant cash advance that has been gaining popularity as a way to finance small businesses. Companies will compare ACH loans against other financing products like factoring and purchase order financing to determine which one will be the best to solve their problems.

Read on to learn about both ACH and invoice factoring and by the end you should have a better idea of what type of product is better tailored to your needs.

ACH Loan

An ACH loan is a term to describe a specific type of Merchant Cash Advance in which the lender finances your future sales. The lender reviews your financial statements and bank deposit track record to determine the amount they can offer. The lender deposits the funds into your bank account once the loan package is underwritten.

The lender makes periodic withdrawals from your bank account to pay back the loan. The lender makes these withdrawals daily, weekly, or monthly until the advance is fully repaid. They are called ACH loans because deposits and withdrawals are made through the ACH system. ACH deposits are also commonly known as “direct deposits”.

Invoice Factoring

Invoice factoring helps companies that have cash flow issues due to customers that are slow paying. Clients pay their invoices in 30 to 60 days which can cause cash flow problems.

The finance company reviews the credit quality of your commercial invoices and provides an advance for invoices that qualify. This advance provides the funds to operate your company and secure new business. Each invoice financing transaction settles as your clients start paying their invoices on their usual schedules.

Invoice factoring can be used on an ongoing basis to improve your cash flow.

Advantages of ACH Loans

ACH loans have a number of advantages, especially for small companies. Here are the three most important advantages.

  • Easy to get – you just need to submit some basic paperwork and include financial and bank statements.
  • Process is quick – ACH finance companies process applications quickly. They can get your company funded in a few days. This turnaround makes ACH loans an interesting alternative for companies that need funds fast due to an emergency.
  • Available to companies that do retail or commercial sales – ACH loans can be used by companies that have retail and commercial sales. Factoring only handles commercial sales only.

Advantages of factoring

There are a number of advantages that come with factoring. Here are the most common advantages.

  • Easier to get than conventional financing – getting a factoring line is easier than getting a bank loan or line of credit. To qualify, the clients need to be creditworthy.
  • Quickly deployed – funding takes place in a couple days.
  • Flexible and grows with your business – factoring lines are flexible and adapt to your business. Your line can increase to adapt to business growth and new sales.
  • Bank account history is not important - Factoring can be used by companies that have had financial problems. Often, factoring is used by companies that are trying to turn around their business due to prior difficulties.

Disadvantages of ACH loans

ACH loans have some disadvantages as well.

  • They have a fixed value – having a fixed value means you must be able to forecast your cash needs as accurate as possible. You might end up with less or more money than you needed.
  • Hard to increase and modify - this inflexibility can be a problem if you are in the middle paying a loan and you need to increase your loan amount. Your lender will not be able to provide additional funding until you pay off the previous loan.
  • They are expensive – they are considered more expensive than the alternative solutions.
  • You must provide accurate financials – your financial statements and bank account track record are used by the lender. The lender reviews past minimum balances and deposits to see if they can finance your company.

Disadvantages of Invoice factoring

Here are some disadvantages of invoice factoring.

  • Solves only one problem - factoring your invoices helps you only if you have cash flow problems because clients are paying receivables in 30 to 90 days.
  • Need good clients – clients need to have good credit.
  • It is expensive – compared to conventional financing it is more expensive.

The Bottom Line

The better solution depends on your type of business, your current situation, and your future needs. Factoring helps you if you have good clients, growing sales, and need funds to operate the business. An ACH loan is a better option if you have minor cash flow problems, run a stable business, or need funds to buy equipment.