Business Line of Credit vs. Invoice Factoring: Compare for Working Capital

Overview

A business line of credit and invoice factoring both address working capital gaps, but through fundamentally different mechanisms. A line of credit is a general-purpose revolving facility — you draw when you need cash and repay when cash is available. A factoring arrangement converts specific outstanding invoices to immediate cash — you can only draw as far as your eligible receivable balance supports. The line of credit offers more flexibility: you can use it for any purpose (payroll, rent, inventory, marketing) regardless of whether you have outstanding invoices. The factoring facility is limited to the collateral — outstanding B2B invoices — but that limitation can be a feature for businesses whose cash flow gap is precisely caused by slow-paying customers. For a B2B business with strong customers, factoring often offers better economics than a line of credit for the same capital need. A $200K receivables balance factors at 1.5–3% per 30 days. A $200K line of credit at 15% APR costs 1.25% per month on the drawn balance — roughly comparable or slightly cheaper than factoring, but requires better credit to access than factoring does. Businesses with challenged credit may only qualify for factoring, not a line of credit. The ideal structure for a growing B2B business: establish both. Use the line of credit for non-receivables working capital needs (payroll, overhead) and factor selectively for receivables gaps, keeping the line of credit available as a general backstop.

B2B distributor with $500K in 45-day receivables and 680 FICO

Consider both — factor for receivables gap, line for other needs Factoring $500K at 1.5% per 45 days costs $7,500. Drawing $500K on a line at 15% APR for 45 days costs $9,250. Similar cost, but factoring scales automatically with invoice volume.

B2C retailer with 650 FICO needs $100K for seasonal inventory

Business Line of Credit Retail has no B2B invoices to factor. A line of credit is the appropriate revolving working capital product.

Frequently asked questions

Can a factoring UCC lien block me from getting a line of credit?

It can complicate it. Factoring companies file a UCC-1 on receivables; a lender offering a line of credit may want a blanket lien or first position on receivables. You may need to negotiate lien release or subordination with the factor to open a line of credit simultaneously.

Which scales better as my business grows?

Factoring scales automatically — as your invoice volume grows, your factoring capacity grows proportionally without renegotiating a credit line limit. A line of credit requires formal amendments and lender approval to increase limits, typically triggering a new underwriting review.