Invoice Factoring vs Business Line of Credit
Invoice factoring sells your unpaid invoices to a funder at a discount, giving you cash now instead of waiting for customers to pay. A business line of credit is a revolving loan you draw on and repay. Factoring is tied to your receivables; a line of credit is tied to your creditworthiness and revenue.
Invoice Factoring vs Business Line of Credit at a glance
| Invoice Factoring | Business Line of Credit | |
|---|---|---|
| Typical cost (US) | 1%-5% per month | 7.99%-24.99% |
| Typical amounts | $10,000 - $5,000,000 | $10,000 - $500,000 |
| Typical terms | Ongoing or per-invoice | 12-36 months |
| Collateral | The outstanding invoices | Often unsecured |
| Best for | Your customers pay slowly and the delay is straining cash flow | Your need is recurring working capital rather than invoice-specific |
Ranges are the published US figures for each product on LoanQualifications.com. Your actual rate depends on the lender and your credit profile.
When Invoice Factoring makes sense
- Your customers pay slowly and the delay is straining cash flow.
- You have strong, creditworthy customers whose invoices are reliable.
- You expect to keep growing and need cash tied to each sale.
When Business Line of Credit makes sense
- Your need is recurring working capital rather than invoice-specific.
- You want to pay interest only on what you draw.
- You have the revenue and credit profile to qualify.
How the cost works
Factoring charges a discount on each invoice, often a percentage plus a fee per invoice, which can equate to a high annual cost if customers pay slowly. A line of credit charges interest on the drawn balance, usually far less.
Effect on your balance sheet
Factoring sells an asset (the receivable), so the cash is not debt in the traditional sense, though it does reduce future collections. A line of credit is a liability you repay.
Customer relationship
Some factoring arrangements notify your customers and collect directly, which can affect the relationship. A line of credit is private between you and the lender.
Run the numbers
Compare the monthly payment for each option with our loan payment calculator, then check the rate range your credit may earn with Do I Qualify? Read the Invoice Factoring requirements and Business Line of Credit requirements before you apply.
Frequently asked questions
Is factoring cheaper than a line of credit?
Usually not. Factoring's discount rate tends to cost more than line-of-credit interest, which is why it suits invoice-driven cash flow rather than general borrowing.
Do I need good credit for factoring?
The funder focuses on your customers' creditworthiness more than yours, so factoring can be accessible to businesses that would not qualify for a line of credit.
Can I use both?
Some businesses use a line of credit for steady working capital and factoring only when a large invoice is slow to pay.
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