Factoring vs line of credit
One sells the invoice. The other lends against the company.
Both convert a receivables gap into working cash, and they are underwritten on opposite things. A line reads your balance sheet and your history. A factor reads your customers. That single difference decides which one a young, fast growing, or thinly capitalized business can actually get.
The short answer
A line if you qualify. A factor if your customers are stronger than you are.
Then the detail, if you want it.
A line of credit is cheaper, quieter, and does not involve your customers, so it is the default answer when the business can get one: 12 months of history, $10,000 or more in monthly revenue, a 625 or better score, and a balance sheet that supports a limit. Draw when you need it, pay interest only on what is drawn, repay when the customer pays.
Factoring wins in the cases a line cannot reach. Capacity is set by your customers' credit rather than yours, so a 14 month old company invoicing a national account can often factor when no line is available at any price. Capacity also grows automatically with sales instead of requiring a new underwriting every time you outgrow the limit, which is why fast growing staffing, freight, and subcontract businesses live on it.
The real cost comparison is not the headline. A 2% fee for 30 days is roughly 24% annualized, which sits above most lines and below most advances. What decides it is usually availability, not price.
Side by side
Where they actually differ.
| Invoice factoring | Line of credit | |
|---|---|---|
| What is underwritten | Your customers' credit and the invoice | Your business: history, deposits, balance sheet |
| Typical cost | Advance 80% to 90%, fee 1% to 5% per period | 8% to 60% annualized on the drawn balance |
| How capacity grows | Automatically with sales and invoice volume | By re-underwriting for a higher limit |
| Does the customer know | Usually yes, on notification factoring | No |
| Who collects | The factor, in most arrangements | You |
| Typical minimums | Creditworthy commercial customers, clean invoices | 12 months in business, $10,000 monthly revenue, 625 credit |
| Speed to set up | 5 to 15 business days, then 24 hours per invoice | 2 to 10 business days |
| Debt on the balance sheet | Sale of an asset, not debt, in most structures | A liability when drawn |
| What happens if the customer does not pay | Recourse or non recourse, set by the agreement | You still owe the line |
| Best fit | B2B and B2G invoicing on 30 to 90 day terms | Seasonal swings and general working capital |
General descriptions of common structures, not offers and not a ranking. Every facility is arranged through third party lenders and funders and is subject to their underwriting, documentation and approval; the actual agreement governs.
When factoring is the answer
Growth the balance sheet cannot keep up with.
When a line is the answer
Factoring fits a specific shape: you invoice commercial or government customers on terms, the customers pay reliably but slowly, and the business grows faster than retained earnings can fund. Staffing companies funding payroll weekly against 45 day invoices, carriers waiting on brokers, subcontractors on 60 day draws. In all of them the constraint is timing, not solvency, and the customer is a better credit than the business.
A line fits the opposite shape: an established business with a swing it can predict, seasonal or cyclical, that wants capital sitting ready without paying for it when it is idle. The discipline a line requires is that it gets repaid at the bottom of the cycle rather than carried permanently at the limit, because a line that never goes to zero is a term loan the lender did not underwrite as one, and it will be reviewed that way at renewal.
Concentration decides more factoring applications than anything else. If 1 customer is most of your book, expect the factor to size around that and to price the risk.
What goes wrong
The mistakes that cost the most.
Reading the fee as an annual rate
A 2% fee for a 30 day invoice is roughly 24% a year, not 2%. Tiered structures that step to 4.5% by day 90 price slow payers far higher. Ask for the schedule, not the first tier.
Missing the ancillary fees
ACH, wire, lockbox, origination, credit approval and minimum volume fees can double the effective cost of a cheap looking advance rate. Ask for every fee in the agreement on 1 page.
Ignoring the recourse question
Under recourse factoring, an unpaid invoice comes back to you, usually at 90 days. Under non recourse, it does not, but only for the specific credit event the agreement names. Insolvency of the customer is covered; a dispute about your work almost never is.
Drawing a line to zero and calling it working capital
A line carried permanently at the limit will be treated as term debt at renewal, often with a clean up requirement you cannot meet. Plan the repayment before the first draw.
Factoring invoices you have already pledged
Receivables subject to a prior UCC filing cannot generally be sold to a factor without a release or subordination. Know what is already filed against the company before you apply.
Questions
What owners ask.
Will my customers know I am factoring?
On notification factoring, yes: the invoice carries a notice to pay the factor and the factor handles collection. Non notification programs exist but require a stronger balance sheet, which is often the reason factoring was chosen in the first place.
Does factoring hurt my credit?
Selling receivables is not borrowing and does not itself appear as debt. The factor will file a UCC on the receivables, which any future lender will see and will need to be released or subordinated.
Can I factor a single invoice?
Spot factoring exists and costs more per invoice than a facility. If the need recurs, a facility is cheaper; if it is genuinely one time, spot is the cleaner answer.
Can I have both a line and a factoring facility?
Sometimes, with an intercreditor agreement that carves the receivables out of the line lender collateral. It is negotiable and it is not automatic.
What kills a factoring application?
Invoices already pledged, customers with weak credit, work that is disputed or not yet delivered, and concentration the factor cannot size around. Progress billing and pay when paid clauses also complicate it.
Start with the file
A straight read within 2 business days.
Send the basics through the intake form: what the file supports, what is missing, and the next step if there is one. If we are not the right desk for it, we say so.