Factoring sells your unpaid invoices for cash now. A business line of credit lets you borrow up to a limit and repay as you go. If you have strong credit and steady financials, a line is usually the cheaper, more flexible tool. If your cash is trapped in slow-paying customers and a bank would turn you down, factoring can fill the gap. The right choice depends on your credit profile, your customers and how long you need the money.
TL;DR
- Factoring is a sale; a credit line is debt. You sell invoices to a factor, or you draw on a revolving limit and pay interest on what you use.
- Lines are usually cheaper, but harder to get. Banks look at your financials. Factors look mostly at your customers' ability to pay.
- Factoring fits B2B businesses with slow-paying customers. A line fits ongoing, varied working capital needs.
- Read the recourse terms and the fee schedule. Some products sold as factoring are really high-cost cash advances.
- You do not have to pick blind. You can compare real offers side by side before you commit.
Table of Contents
- How each one works
- Side-by-side comparison
- What each one costs
- Who qualifies more easily
- Recourse, and what it really covers
- Collateral and personal exposure
- Where factoring goes wrong
- What each is used for
- How to choose
- Our perspective
- Compare offers with Formosity Funding
- FAQ
- Sources
How each one works
Factoring
With invoice factoring, also called accounts receivable financing, you sell unpaid invoices to a third party at a discount and get cash right away. The SBA describes invoice financing as a way to bridge the gap between making a sale and getting paid.
A typical flow looks like this:
- You deliver goods or services and invoice a business customer.
- You send the invoice to the factor.
- The factor advances a share of the face value. Advance rates commonly run from 70% to 90%, per the OCC's small business road map.
- Your customer pays the invoice, usually to the factor.
- The factor releases the remaining balance, minus its fees.
The invoice itself is the collateral. The factor cares most about whether your customer will pay. One practical effect: in many arrangements your customers are told to pay the factor directly, so they will know you use one.
Business line of credit
A line of credit is a revolving facility. You get an approved limit, draw what you need, and pay interest only on the balance outstanding. When you repay, the available credit comes back. The SBA calls lines generally a more flexible, efficient way to manage ongoing working capital.
Lines are the workhorse of small business borrowing. In the FDIC's 2024 survey, 70.5% of banks said lines are mainly used to fund receivables, inventory or general working capital.
Side-by-side comparison
| Factor | Invoice factoring | Business line of credit |
|---|---|---|
| What it is | Sale of invoices | Revolving debt |
| What backs it | The invoices | Business assets, cash flow, sometimes a personal guarantee |
| What the provider examines | Your customers' payment ability | Your credit, financials, time in business |
| How you pay | Fee taken from each invoice | Interest on the drawn balance, plus any fees |
| Access to funds | Only when you have eligible invoices | Any time, up to the limit |
| Scales with | Sales volume | The limit you were approved for |
| Customer involvement | Often notified to pay the factor | None |
| Best for | B2B firms with slow-paying clients | Varied or unpredictable expenses |
What each one costs
The two products price differently, so comparing the headline numbers directly misleads.
A line charges interest on the amount drawn, often with fees on top. Your cost depends on how much you borrow and for how long. For current ranges and the fees to watch, see our guide to business line of credit rates, and our walkthrough of modeling fees first on revolving credit.
Factoring charges a fee on each invoice, often tied to how long the invoice stays unpaid. Because it is a fee on a short-lived asset, converting it to an annual rate can look steep even when the dollar cost of one invoice looks small. The FDIC's examination manual treats factoring as a purchase of assets, and regulators note that its fees often exceed the interest on traditional lines.
A simple way to compare: take one real invoice and ask for the total dollars you would pay under each option over the number of days you actually need the cash. Our 60 to 90 day cost model for invoice financing vs factoring walks through that exercise.
A worked example
Say you invoice a customer $50,000 on net-60 terms and need cash now. These figures are illustrative, not an offer or a quote.
- Factoring at an 80% advance: you receive $40,000 up front. The remaining $10,000 comes back after your customer pays, less the factor's fees.
- A line of credit: if you have a $50,000 limit, you draw $40,000 and pay interest only until you repay it. If the customer pays in 60 days, you pay about two months of interest on $40,000.
The line is likely cheaper in this case, provided you have one and it has room. Factoring wins when no line is available, or when your limit is too small for the invoice.
Who qualifies more easily
Bank lines typically ask for detailed financial statements, tax returns and ongoing covenants. Factoring focuses primarily on your customers' creditworthiness rather than just your own balance sheet, and is often used by firms that cannot meet bank underwriting.
That does not make factoring a free pass. Factors usually apply eligibility rules to invoices. One example is a concentration limit: no more than 20% to 25% of receivables from a single customer is a common benchmark. If one big client makes up most of your sales, your usable advance may be smaller than you expect.
A factor can also change its mind. In one sample factoring agreement filed with the SEC, the factor keeps discretion over written credit approval of your customers' orders. That means financing you planned around can shrink if a customer's credit looks worse.
Recourse, and what it really covers
In recourse factoring, you owe the factor if your customer does not pay. Non-recourse shifts some of that risk to the factor, but usually only for specific credit events, such as the customer's insolvency. It generally does not cover a dispute over the quality of what you delivered. Read the definitions in the contract, not the label. Our guide to recourse vs nonrecourse factoring covers the questions to ask.
Collateral and personal exposure
A line of credit may be backed by general business assets, and many lenders ask for a personal guarantee. Factoring is collateralized by the invoices themselves. Before you sign either, know what you are pledging. We explain the options in what small businesses can pledge as collateral.
Where factoring goes wrong
The Secured Finance Network notes that factoring lets capital turn several times a year, which is the upside. The flip side is that a provider with weak verification can push a business into a cycle of costly financing just as fast as it supplies cash.
The bigger danger is products that borrow the factoring name. The FTC's staff perspective on small business financing flags merchant cash advances with disguised fees and daily withdrawals. Real factoring is a straightforward sale of invoices. Warning signs of something else:
- Fixed daily or weekly withdrawals from your bank account, regardless of whether customers have paid.
- A "factor rate" quoted as a single multiplier with no invoice-by-invoice accounting.
- A confession-of-judgment clause.
- No reconciliation clause when your sales dip.
- A personal guarantee on a product pitched as "no collateral."
The FTC has also acted against firms accused of continuing to withdraw money from small businesses after they had repaid what they owed. If a term sounds unclear, get it explained in writing before you sign.
What each is used for
A line suits costs that come in unpredictable pieces: payroll gaps, seasonal swings, supplier deposits. Inventory-heavy firms often lean on one, and the planning discipline in this inventory reorder point guide helps you size the working capital you will need before you borrow.
Factoring suits a single, specific problem: your customers take 30, 45 or 60 days to pay, and you need to cover costs in the meantime. It only works if you invoice other businesses or government buyers. It does not help a retail or consumer business without invoices.
If part of your delay comes from how customers pay you, tighter billing can help before you finance anything. This plain guide to ACH invoice payments shows how faster payment methods shorten the wait. Note that it is written for solo tradespeople, so adapt the ideas to your size.
If what you actually need is money to buy inventory for a confirmed order rather than money against a bill already sent, that is a different tool. See our cost checklist for PO financing vs factoring.
How to choose
Ask yourself five questions.
- Do I invoice other businesses on payment terms? If not, factoring is off the table.
- Can I qualify for a line today? If yes, price it first. If a bank would decline you, factoring may be the practical path.
- Is the need recurring and varied, or tied to a few invoices? Varied needs favor a line. Invoice-specific gaps favor factoring.
- How do my customers feel about paying a third party? If it would hurt a key relationship, ask about confidential arrangements, or choose a line.
- What is my total cost for the time I need the cash? Compare in dollars, not labels.
Some businesses use both: a line for routine needs and factoring for a spike in large invoices. The two can coexist, but the lender behind your line may have a claim on your receivables, so check for conflicts first. A lien on the same assets can complicate a factoring deal.
Our perspective
We see the same pattern over and over. Owners start with the product they have heard of, not the one that matches their cash cycle. A line gets chosen when the real problem is a few slow invoices. Factoring gets chosen when a line was available at a lower cost.
What we have learned from running a marketplace of lenders is that the best move is to put real offers next to each other. The numbers often look different from what an owner expected. We would rather you compare two or three actual offers, with fees written out, than guess from rate ranges online.
Our view on a few points:
- If you can get a line, price it first. It is typically the more flexible product for ongoing needs.
- If you factor, insist on a clear schedule of fees, a plain recourse definition and a short exit path.
- Treat any product that pulls fixed daily payments as a different category and read it twice.
- Pre-qualification should never cost you credit. Ours does not affect it.
— Alvin
Compare offers with Formosity Funding
We connect small and medium-sized businesses with a nationwide network of lenders. You can pre-qualify with no credit impact, see real offers, and work with a dedicated funding specialist who guides you from application to funding. Working capital and business lines of credit are among the options on our business funding options page. If you are not sure which structure fits, start there, or read our guide to cash flow financing first.
FAQ
Is factoring the same as a line of credit?
No. Factoring is the sale of your invoices to a third party, so it does not add debt. A line of credit is a revolving loan that you repay with interest. Some providers sell an "AR line of credit" that borrows against invoices, so check which structure the contract actually describes.
Is factoring more expensive than a line of credit?
Usually, yes. Regulators observe that factoring fees often exceed the interest on traditional lines, since factoring tends to serve businesses that cannot get unsecured credit. The cost for one invoice can still be modest, so compare the total dollars over the days you need the money.
Can I use both at the same time?
Sometimes. Many businesses use a line for everyday needs and factor selected invoices. Your line agreement may place a lien on receivables, so confirm with both providers that the two do not conflict.
What is the difference between invoice financing and factoring?
In factoring you sell the invoices and the factor often collects from your customers. In invoice financing, as the SBA describes it, you generally keep control of your own collections and invoice processing. Both give you cash against unpaid invoices.
Does factoring hurt my credit?
Factoring decisions rest mostly on your customers' credit, so it is not typically a credit check on you in the way a bank line is. Terms vary by provider, so ask what they pull and report before applying.
Sources
- SBA: 3 Ways to Get Working Capital for Your Business
- OCC: Small Business Road Map, March 2020
- FDIC: 2024 Small Business Lending Survey
- FDIC: Examination Policies Manual, Section 3.2
- Secured Finance Network: 2025 market sizing insights
- FTC: Small business financing, Staff Perspective
- FTC Consumer Advice: Small businesses targeted with unauthorized withdrawals
- SEC filing: sample factoring agreement
- Financial Models Lab: invoice financing insights