Invoice Factoring vs Business Line of Credit

Invoice factoring and business lines of credit both solve the B2B cash flow timing problem — but through fundamentally different mechanisms. Factoring converts specific invoices to cash immediately without adding debt. A line of credit provides a revolving credit pool you draw and repay as needed. For businesses with strong receivables and credit-challenged or newer operations, factoring often wins. For businesses with strong credit and consistent cash needs, a line of credit may cost less over time.

Factor	Invoice Factoring	Business Line of Credit
Mechanism	Sell invoices for immediate cash	Draw from revolving credit pool
Cost	1–5% per invoice	15–40% APR on drawn balance
Approval Based On	Client creditworthiness	Business credit + personal credit
Min Credit Score	None (client credit matters)	600–620+ typically
Min Time in Business	0 months (with invoices)	6–12 months typically
Balance Sheet Impact	Asset sale (not debt)	Liability (debt)
Max Amount	Tied to invoice volume	Fixed credit limit
Repayment	When client pays factor	Weekly or monthly
Client Notification	Usually required	Never (your relationship)

Bottom Line Verdict

Factoring wins for newer businesses or those with credit challenges. LOC wins for established businesses with strong credit who want flexible, cost-effective capital.

A factoring fee of 3% on a $100,000 invoice ($3,000) collected in 45 days equals an annualized rate of approximately 24%. A business line of credit at 20% APR for the same 45-day draw costs $2,466. The LOC is cheaper — but requires 600+ credit and 6–12 months in business. Factoring has no business credit requirement, doesn't appear as debt, and is accessible on day one.

Frequently Asked Questions

Does factoring hurt my client relationships?

In notification factoring (most common), your client is informed to pay the factoring company instead of you. Most commercial clients are familiar with this arrangement. In non-notification (confidential) factoring, the arrangement is not disclosed to clients. Confidential factoring is available but typically costs more.

Can I use a line of credit AND factor invoices?

Yes. Some businesses use a line of credit for general working capital and factor specific large invoices when timing is critical. The two aren't mutually exclusive, though lenders require disclosure of both positions.

What happens if my client doesn't pay the factoring company?

In recourse factoring (most common, lower cost): you are responsible for buying back the unpaid invoice. In non-recourse factoring (higher cost): the factoring company absorbs the loss for qualified non-payment events (typically client insolvency). Non-recourse doesn't typically cover client disputes or slow payment.

Which is better for a staffing agency?

Factoring is the industry standard for staffing agencies. The model perfectly matches the staffing cash flow cycle: bill corporate clients on net-30 to net-60, but pay temps weekly. Factoring converts the client invoice to same-day cash, enabling consistent weekly payroll without a revolving debt position on the balance sheet.

Invoice Factoring vs. Line of Credit

Frequently Asked Questions

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