Factoring vs. Tax Refund Anticipation Loans (RALs)

If you find your business in a cash bind, you might be tempted to take advantage of one of those “instant” tax refund offers you see on TV.  But before you rush to file your taxes, you should dig a little deeper.  These so-called “instant” tax refunds are in reality, refund anticipation loans (RALs) and they can be very expensive.
Many income tax preparation companies aggressively market these “Quick Cash” tax refund loans.  They promise cash within 24 to 48 hours for their customers who need money in a hurry.  What your friendly income tax preparation company is really doing is selling you an advance loan on your anticipated tax refund.  It is a short-term loan, usually issued by a bank and secured by your tax refund.

These loans usually last seven to 14 days – or until the IRS refund repays the loan.  With electronic filing, you often receive your refund within two weeks; so if you can wait for two weeks you can save a lot of money.   It’s when you truly can’t wait those two weeks, then a tax refund anticipation loan (RAL) sounds very attractive.  
As with all loans, interest and fees apply and therein lies the warning! These fees are automatically deducted from the loan amount, and the interest is calculated on how long it takes for your refund to be received.   Depending on your loan terms, and the time it takes for your refund to arrive, you may end up paying the equivalent of over 200% APR!   It’s all in the small print.

There is an alternative.   If you find yourself, or your business, in a cash bind you could use a factoring service to turn some of your company’s accounts receivables into “quick cash.”  Factoring services for the small business include invoice, or accounts receivable, factoring.  So, if your company is in the process of fulfilling orders, or has outstanding accounts receivable invoices, you can receive the funds tomorrow from factoring companies who will immediately pay up to 90 percent against invoices you are selling, with the balance, less professional fees and interest charges, paid upon receipt of invoice payment.  Again, this is not “cheap” money, the APR is not low, but if your customers pay within 60 days, the interest payments are not prohibitive.

Factoring is not for everyone.  You must be a B2B company.  You must meet required minimums for monthly billing.  There are no minimums, or maximums on the number of invoices your business can factor.  There are no long term commitments.  You choose the factoring services you need.