Factoring vs a line of credit. 20 million a month.

The call we keep getting

Someone wants a revolving line of credit. A million dollars. Maybe two. They heard it is cheaper than factoring.

On a small unsecured line, the coupon can look cheaper. That is not this desk. A 1 million credit line is a bank product. The box here is 20 million a month in B2B invoices to strong account debtors.

If the book is that size, the question is not which product sounds cheaper. The question is who is watching the people who owe you.

What each product actually buys

A line of credit is a loan against you. The bank looks at your financials, your history, and often a personal guarantee. You draw. You pay interest. You still collect from your customers. If a big name stretches terms and then files, that loss sits with you.

Factoring is a sale of invoices. The factor advances 80 to 95 percent of face on eligible B2B paper and collects from the account debtor. Pricing sits in a band of about 0.5 to 3.5 percent per 30 days depending on the debtor, dilution, and whether the structure is recourse. The factor is buying the customer, not your FICO.

That is why factoring fits staffing, trucking, manufacturing, distribution, construction, and government contractors with creditworthy B2B names. Consumer cards are a pass. One weak customer as the whole book is a pass.

The benefit a revolver does not give you

A good factor sits on the same large debtor across many clients. Payment behavior shows up early. Net 30 becomes 60. Then 90. Then the factor cuts the account and tells the client to stop shipping on open terms. A revolving line sits on you. If your biggest customer is slipping, the line still lets you fund payroll into an invoice that may never clear.

Polaroid, 12 October 2001

Polaroid Corporation filed Chapter 11 on 12 October 2001 in Massachusetts. The filing listed about 1.81 billion in assets and 948 million in debts. Bank debt of 360 million was due 15 November. Bondholders were owed about 575 million. In July 2001 Polaroid had already said it would miss bond payments. That is the window.

The company lined up 50 million of new money to keep operating. About 40 million of that was for suppliers on goods shipped after the filing. Polaroid's own statement was plain. Suppliers who shipped before 12 October had pre petition claims. Those claims were frozen pending court authorization or a plan.

If Polaroid was your customer and you kept shipping on open terms into that filing, you sat in line. Post filing invoices could get paid. The invoices already on your books did not automatically get paid.

Kodak, 19 January 2012

Eastman Kodak Company filed Chapter 11 on 19 January 2012 in the Southern District of New York, case 12 to 10202. It lined up 950 million of new money to keep the flow of goods going after the petition. Kodak said it would honor post filing obligations to suppliers in the ordinary course.

Pre petition trade was a different stack. Kodak asked the court for authority to pay selected critical vendors. That motion was postponed. A New York bankruptcy judge was skeptical that those vendors were truly critical. Pre petition trade sat with the other unsecured claims.

Same pattern as Polaroid. The name was famous. The invoices shipped before the petition were not cash. A factor watching that debtor across many clients is built to see 30 become 60 become 90 and stop buying the paper. A revolver is not.

When the line still makes sense

Take the revolver when all of this is true. The book is large. You can report a borrowing base. You want inventory and AR in one facility. You have in house collections and you do not need the factor sitting on the debtor.

Take factoring when the cash gap is the invoice. The customers are strong. You want the advance on face, collections, and a second set of eyes on concentration. Payroll cannot wait on net 60.

Many operators grow from factoring into an asset based line once the book and the reporting can carry it. That graduation is real. It is not a 1 million starter line.

What this desk will look at

20 million a month in B2B invoices. Advance 80 to 95 percent of face. Trucking, staffing, manufacturing, construction, government contractors. Tape and aging in the file. Sub 20 million a month stays off this page.

A 1 million revolving credit line is not a factoring file and it is not this box. Talk to PeerSense on the book you actually have.