55 (150) 2022


Credit vs factoring – which is better?

By Bibby Financial Services
Header bibby financial services

This article looks at how firms can lower their financing costs, avoiding high interest rates – in other words – what are the optimal financing methods during a time of crisis?

In recent months we’ve grown accustomed to rising interest rates and more expensive loans. Running a company requires a constant flow of cash, especially when raw materials and components are becoming more expensive, energy costs are rising, and employees are demanding pay increases due to inflation. The risk of losing liquidity is rising daily. If you’re looking for finance, but can’t get a loan, or do not want to take on any more liabilities, it’s worth considering factoring.

More and more companies are starting to finance their growth through factoring. In the first half of 2022, interest in this form of financing increased by more than a third, compared to the same period in 2021. We’ve never seen such dynamic growth in this industry before. Entrepreneurs are opting for this method of financing because it improves liquidity, helps avoid payment bottlenecks and provides an opportunity to build a positive image of a reliable and solvent company. Most importantly, it’s not affected by the rising interest rates.

What is factoring?

Factoring is a financing method which involves selling your invoices to a factoring company. It’ a big help to a company’s cashflow, because it means you don’t have to wait for payment from your clients. Instead, you get your money instantly and never have to worry about chasing your clients for payment. It can be as low as 0.5% of the invoice value, depending on the number of extra services provided (more on that later).

How does factoring compare to a loan?

There are several differences which make factoring a safer and more flexible financing method.

Factoring does not affect the company's balance sheet

The most important difference is that factoring is not a liability. Funds from factoring are not borrowed – they belong to the company. Factoring simply speeds up the time it takes for you to get money for the products and services you sold. The financial cost of factoring does not appear in the balance sheet, it’s an operating expense, which means that – unlike loans – it does not affect the company's creditworthiness. Therefore, it’s a good solution for firms that want to keep a positive gearing ratio and do not want to go into debt for various reasons. Additionally, there’s a type of factoring (full factoring) which protects you from your clients’ insolvency. If they go bankrupt and can’t pay you back, you’ll still get your money from the factoring company. In the case of a loan, the risk rests with the entrepreneur and he bears the costs of the recipient's insolvency.

It’s easier than taking out a loan

The assessment process for signing a factoring agreement is a lot less complicated than taking out a loan, and it does not consider your company’s creditworthiness indicators. Factoring is available regardless of your level of debt, reduced creditworthiness, or temporary liquidity problems. Your company’s history doesn’t matter. Instead, factoring examines your current clients because it is they who pay back the liability to the factor, not the entrepreneur, as in the case of a loan.

Therefore, factoring can also be a good financing solution for companies that are just starting out, or do not have the collateral required for a bank loan. In fact, factors will often have special offers for small firms unable to get a loan. For example, the procedures offered by Bibby Financial Services for micro-enterprises are even more simplified, there is no minimum commission and the contract term is not fixed.

Factoring can also be used by companies with long payment periods to speed up growth (increase production capacity or gain new customers) thanks to the accelerated cash flow. One of the main advantages of factoring is the ability to allocate your funds freely, for example, to settle your liabilities, buy raw materials or for investments. In the case of a loan, there’s a strictly defined way of spending the borrowed money.

It scales with your business

Factoring is directly based on your invoices and therefore perfectly scales with your sales. There’s no minimum number of sales you need to make to maintain your financing, unlike a loan, which needs to be paid back no matter what condition your business is in. If your income goes down or expenditure goes up, factoring will scale to match your current situation. As you grow, you’ll have more invoices to sell and your factoring financing will scale in real time, making sure you always have the right amount of money coming in, when you need it.

It’s safer than a liability

Unlike a loan, factoring is not a debt you need to pay off. When taking out a loan, you need to keep paying back the capital amount (plus interest) regardless of whether you have the cashflow to do it or not. As long as business doesn’t slow down, you’ll make your repayments in time and never have to worry about it. However, in times of uncertainty loans can quickly become a heavy burden. Interest rates can fluctuate – something that’s happening at a very high level all around the globe now. If an investment falls through, it might turn out you don’t need the money you borrowed, but still have to pay it back with interest. If you’re growing too quickly and need more funds than originally anticipated, it might be impossible to take out an additional loan. Borrowing is a risky and rigid form of financing. With factoring, that risk or rigidness do not exist.

Additional services

With factoring, you get many added benefits. Apart from providing finance, the factor will also verify your potential clients, chase payments, look after the administrative processes and if needed, carry out the debt-collection procedures. You’ll save much time, as the factor relieves you of the tedious task of monitoring payments. The process is simple and lets you focus on the things that actually matter – developing your business.


Deciding whether to take out a loan or use factoring should be done after careful analysis of all the pros and cons of each financing method. It’s worth remembering that debt financing and factoring are not mutually exclusive and can even complement each other. Factoring will help you stay liquid and retain creditworthiness, and thus leaves an open door to obtain bank financing in the future. If you’re looking for a reliable factoring partner, consider Bibby Financial Services – we’ve financed the growth of Polish SMEs for 20 years.


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