Credit line, factoring or confirming: which short-term financing to choose

When a small business sees a cash dip on the horizon, the bank usually offers several solutions with similar names. They all serve the same purpose (having money sooner), but they work differently, cost differently and suit different situations. This is a guide to understanding them before you sign.

Before you finance yourself

Short-term financing covers a timing gap: the money arrives, but it arrives late. If the problem is that the business doesn’t generate enough margin, financing it only postpones it. So, first of all:

• Make a cash flow forecast to know how big the dip is and how many days it lasts.
• Try to collect sooner what you are already owed: it is the cheapest financing there is.

If you still need financing, these are the most common options.

Credit line

It is a limit of money that the bank makes available to you for a period (normally a year, renewable). You use it when you need it and repay it when you collect.

• How it is paid: interest only on what you use and for the days you use it. There is usually also an arrangement fee and, sometimes, a fee on the part you don’t use.
• When it fits: short, repeated dips, for example when in certain months of the year you pay before you collect.
• Watch out for: using it as permanent financing. If the credit line is always at its limit, you are not covering a dip: you are structurally short of cash.

Invoice advance (commercial discounting)

You take to the bank invoices from customers that have not yet fallen due and the bank advances you their amount, minus interest and fees. When the customer pays, the bank collects.

• How it is paid: interest for the days remaining until the due date plus a fee per invoice.
• When it fits: when you have invoices to good customers with long due dates.
• Watch out for: it is normally with recourse: if the customer doesn’t pay, the bank claims it from you. The risk of non-payment is still yours.

Factoring

You assign your invoices to an institution (the factor), which takes care of collecting them and advances you their amount. It can be with or without recourse.

• Without recourse, the factor takes on the risk that the customer doesn’t pay because of insolvency. It is more expensive, but you get rid of that risk.
• With recourse, the risk is still yours and the cost is lower.
• When it fits: when you sell a lot to a few customers with long terms, or when a large customer concentrates too much risk.
• Watch out for: the factor studies your customers, not just you, and may not accept some of them.

Confirming

This one is contracted by your customer, not you. Your customer instructs its bank to pay its suppliers and, when it “confirms” an invoice from you, it offers you to collect it before the due date in exchange for a discount.

• How it is paid: if you wait until the due date, it costs you nothing; if you take the advance, you pay interest for the days you advance.
• When it fits: when a large customer already works with confirming. A confirmed invoice is a very safe collection.
• Watch out for: you don’t control the term, your customer sets it. And if you want to offer confirming to your own suppliers, remember that you cannot pay them in more than 60 days.

How to compare the real cost

The interest rate is not everything. Add up interest and fees and calculate the cost for the days you actually use the money. An example:

That €297.26 for 60 days is equivalent to a little over 9% a year (€297.26 ÷ €20,000 × 365 ÷ 60), quite a bit more than the 6% that appears in the offer. Always do this calculation with the real figures your bank gives you.

Frequently asked questions

What is the difference between factoring and an invoice advance?

With an advance, the bank gives you the money but you keep managing the collection and, normally, bearing the risk of non-payment. With factoring, the institution takes care of the collection and, if it is without recourse, also takes on the customer’s insolvency risk.

Which is better, a credit line or an invoice advance?

The credit line is more flexible because it doesn’t depend on having specific invoices, but the bank grants it according to your solvency. The advance depends on your invoices and the quality of your customers. Many small businesses combine the two.

Can I contract confirming myself to get paid sooner?

Not directly: it is contracted by the company that pays. If your customer has it, you can ask them to include your invoices. To advance the collection on your own, the options are the invoice advance or factoring.