When the issue is with the cash register, the first question isn’t “Can I borrow some money?”, but rather “What type of cash register problem do I have?”. A long payment term, a need to replace the equipment, and an expansion investment are all distinct problems, and each one requires a different solution.
What does each instrument accomplish?
| Instrument | What does it solve? | Reference cost | Typical term/period | What does he/she ask for as a guarantee? |
|---|---|---|---|---|
| Factoring | Long payment terms for clients | Reference rate, based on the payer’s risk (not a published rate). | Payment in advance, typically with terms of 30 to 90 days. | The provided invoice, plus the payer’s confirmation. |
| Leasing | To purchase or renew a specific asset (machinery, vehicles, equipment). | Referential rates typically fall within the range of short- and long-term debt rates. | From 2 to 7 years, depending on the useful life of the asset. | The funds, which remain under the landlord’s name until the end of the contract. |
| Bank debt | Capital of work or investment, with a proven track record and its own guarantees. | The lowest of the three when there’s a history and guarantees. | From 1 to 10 years, according to fate. | Historical record, real guarantees or a guarantee, and demonstrated ability to pay. |
The cost figures are provided as a reference, as each operation is quoted based on the risk associated with the client, the payer, or the project itself. These are not standard rates and vary from case to case.
Factoring: the issue is the deadline, not solvency.
Factoring involves selling an already issued invoice in exchange for an advance payment. The entity assessing the risk is primarily the recipient of that invoice, not the company that issued it. Therefore, a small and medium-sized enterprise (SME) with a short history but significant and reliable clients often utilizes factoring, even if it wouldn't qualify for a bank loan under its own name.
In Chile, Law 19.983 granted executive status to electronic invoices, which made this current market possible. Without this law, demanding payment on an unpaid invoice would require a full legal proceeding. Furthermore, there is a public registry of transferred invoices that prevents a single invoice from being used twice as collateral.
Leasing: when the asset, not the cash flow, is the problem.
Leasing finances a specific asset, and that same asset serves as the natural guarantee for the agreement during the contract term. It’s particularly beneficial when the issue isn’t the overall financial health of the business, but rather the need to renew or acquire a specific asset – such as a vehicle, a production line, medical or hotel equipment. The payment is made as an operating expense throughout the contract, and at the end, there is usually an option to purchase the asset at a pre-agreed residual value.
Bank debt: the cheapest, the slowest.
When a company has a history, organized financial statements, and real guarantees, bank debt is often the most cost-effective option among the three. The downside is that it also requires the most extensive documentation and takes the longest to approve, precisely because the bank evaluates the company as a whole, not a single invoice or asset. It’s the route that most benefits from thorough preparation from the outset, as explained… How to prepare a case before seeking bank financing..
What to look for in a contract, beyond the rate.
The cost that is most frequently compared across offers is the interest rate or discount factor, but it’s rarely the only thing that changes the actual cost of the operation:
- Commission for structuring. A fixed fee for setting up the operation, in addition to any interest or discounts that some institutions charge, and others do not.
- Advance payment notice period. Canceling early can come at a cost, or it might not; it’s important to know this before signing, not after you’ve already opted for prepayments.
- What happens if a client delays paying a factored invoice? Some factoring contracts are “with liability,” meaning that if the payer doesn’t pay, the company that ceded the invoice is also responsible; others are not. This difference completely changes the actual risk of the operation.
- Insurance associated with a leasing agreement. It’s almost always mandatory, and it’s the responsibility of the person renting the property. It’s advisable to quote for it separately and not include it as part of the rental fee.
None of these points are consistently included in the initial proposal submitted by the institution. They tend to appear in the fine print, and that’s where the real difference often lies between two offers that, at first glance, seem similar.
How to choose, without wasting time.
The correct question isn’t “which instrument is ‘best’ in an abstract sense,” but rather, “what financing problem are we addressing today: whether it’s a client paying with 90-day terms, factoring; whether it’s equipment that needs replacing, leasing; or whether it’s an investment that’s being paid off over several years, through a bank loan.” Debt structuring and access to financing Craft the case to fit the appropriate route, and when it’s beneficial to combine multiple, simply combine them, rather than forcing the entire problem into a single instrument.
Choosing poorly doesn’t mean funding won’t arrive. It means paying more, waiting longer, or sacrificing a warranty that you’d otherwise want to keep available for something else.