Comparison
Invoice factoring vs. a business line of credit
Invoice factoring sells your unpaid invoices for an advance, so approval depends mostly on your customers’ credit. A line of credit is a revolving loan, so approval depends mostly on your business’s credit, revenue and time in business. Factoring tends to fit businesses waiting on slow-paying commercial customers; a line of credit tends to fit businesses with steadier finances that need flexible access to cash.
By Truidian · Updated
How each one works
With invoice factoring, a business sells eligible unpaid B2B invoices to a factoring company. The factor advances a large share of the invoice value, often within a day or two, then pays the remainder less its fee once the customer pays. The invoice is the asset; no new debt is generally created in the traditional sense.
A business line of credit is a revolving credit limit. The business draws what it needs, repays, and draws again, usually paying interest only on the balance outstanding. It is a loan, so the lender underwrites the business itself.
The differences that matter most
These are the points businesses usually compare first. Exact terms vary by provider.
- What is underwritten: factoring looks mainly at your customers’ ability to pay; a line of credit looks at your business’s financials and credit.
- Speed: factoring advances can arrive in a day or two once set up; lines of credit can take longer to approve but are then available on demand.
- Cost structure: factoring fees are usually a percentage of each invoice, often tiered by how long the invoice takes to be paid; lines of credit charge interest and sometimes draw or maintenance fees.
- Scales with: factoring availability grows as your invoicing grows; a line of credit has a fixed limit until it is reviewed.
- Customer involvement: factoring commonly involves notifying customers to pay the factor; a line of credit is invisible to your customers.
Which one tends to fit which situation
Businesses that invoice other businesses on net-30 to net-90 terms, are growing quickly, or are too new for a bank line of credit often explore factoring first. Businesses with established financials, a mix of customers and uneven but predictable cash needs often explore a line of credit.
The two are not mutually exclusive. Some businesses use factoring for slow commercial receivables and keep a line of credit for everything else. Compare the full cost of each, not only the headline rate.
FAQ
Common questions.
Is invoice factoring cheaper than a line of credit?
Usually not on a pure cost-per-dollar basis. Factoring fees are generally higher than line-of-credit interest, but factoring can be available to businesses that do not qualify for a line of credit at all, and it funds against invoices you have already earned. Compare the all-in cost for your invoice timing.
Can a new business get invoice factoring?
Often yes. Because factoring underwriting focuses on your customers’ creditworthiness, newer businesses that invoice established commercial or government customers can sometimes qualify earlier than they would for a bank line of credit.
Can I use factoring and a line of credit together?
Sometimes. Factoring companies usually take a first claim on the invoices they purchase, so any other lender must agree not to conflict with that. Check both agreements before combining them.
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Truidian is a business solutions company, not a lender, factoring company or payment processor. Services are offered by participating third-party providers and are subject to their approval and terms. Figures shown are general ranges, not offers or quotes. This content is general information, not legal, tax, accounting or financial advice.