B2B Invoice Factoring vs Line of Credit: Which Fits Your Cash Flow?

What Each Product Actually Is

**Invoice factoring:** You sell eligible B2B invoices to a factoring company at a discount. Factor advances 80-90% of invoice face value upfront, releases reserve minus fee when customer pays. Repayment is automatic from customer payment — no monthly debt service, no daily ACH. Factor underwrites the CUSTOMER'S credit (not yours). Typical fee 1-3% per 30 days the invoice remains outstanding.

**Bank line of credit:** Revolving credit facility from a bank — draw funds as needed up to a credit limit, pay interest on outstanding balance, repay over time. Priced at Prime + 1-3% (~9.5-11.5% effective April 2026). Bank underwrites YOUR business credit + personal credit + financial history. Typical setup: 2+ years operating history, profitable cash flow, full financials, personal guarantee, often collateral.

Cost Comparison

Bank LOC is materially cheaper IF you qualify and use the line. Annualized cost ~9.5-11.5% on outstanding balance, plus annual fees + (sometimes) commitment fees on unused capacity.

Factoring is more expensive but charges only on invoices factored — not on commitment. 1-3% per 30 days = annualized 12-36% on factored amounts. Customer pays fast (15-25 days)? Effective cost lower. Customer pays slow (45-60+ days)? Effective cost higher.

**Math example:** $500K of average outstanding receivables, 30-day average payment cycle. - Bank LOC: $500K × 10.5% = $52.5K/year + ~$2.5K annual fees = $55K total. - Factoring: $500K × 1.5% × 12 cycles = $90K/year. - Difference: $35K/year — that's the cost of factoring's flexibility.

Bank LOC wins on cost but loses on flexibility, speed, and qualification. Factoring wins on speed (7-14 day setup), customer-credit-based underwriting (not yours), and no covenants (unlike bank LOC which often has cash flow / debt service / leverage covenants).

When Factoring Wins

Factoring is the better choice in five specific situations:

**1. New or rapidly-growing business.** Less than 2 years operating history. Bank LOC requires history; factoring qualifies on customer credit only.

**2. Profitable but bank-declined.** Maybe a personal credit issue, prior bankruptcy, complex tax returns, or industry the bank's policy excludes. Factoring works because customers are creditworthy regardless of borrower's history.

**3. Government contractors.** Federal / state / municipal government invoices factor cleanly because government creditworthiness is unquestionable. Many banks decline government-contractor LOCs due to slow government payment cycles + lien complexities.

**4. Staffing / payroll-heavy businesses.** Payroll is twice-monthly cash drain; factoring matches receivable timing. Banks often decline staffing companies for LOCs due to cash flow volatility.

**5. Trucking, freight, logistics.** Fuel, driver pay, equipment maintenance are all immediate cash demands. Factoring against freight invoices is the standard working capital tool for the industry.

When Bank LOC Wins

Bank LOC is the better choice when:

**1. You qualify.** 2+ years profitable operating history, 680+ FICO on principals, full bank-documentation-ready financials, willing to provide personal guarantee.

**2. Low utilization expected.** If you'll only draw 20-30% of the line on average, the LOC's commitment fee is materially cheaper than factoring's per-invoice fee.

**3. Long average receivable cycle (60+ days).** Factoring fees compound monthly; LOC interest accrues only on drawn balance. At 60+ day average DSO, LOC's cost advantage widens.

**4. You value relationship banking.** Bank LOC builds a credit history with your bank that supports future SBA, equipment, or commercial real estate lending from the same institution. Factoring doesn't build that relationship.

**5. Simple ops preferred.** No invoice-by-invoice transaction with factor; just draw / repay against the LOC. Less administrative overhead at scale.

ABL: The Larger-Scale Alternative

At $5M+ revenue, Asset-Based Lending (ABL) often beats both factoring and traditional bank LOC.

**ABL structure:** Revolving credit facility secured by a borrowing base of accounts receivable + inventory. Typical advance rates: 80-85% of eligible AR + 50-60% of eligible inventory. Borrower draws against the borrowing base; lender adjusts available credit weekly or monthly based on borrowing base reports.

**Pricing:** Prime + 1-3% on outstanding balance (similar to bank LOC), plus borrowing base monitoring fees (~$5-25K annual depending on complexity).

**Why ABL wins at scale:** Higher advance rates than factoring (85% AR vs 80-90% factoring). Cheaper than factoring (cost of capital 9-11% vs 12-36% factoring). More flexible than bank LOC (asset-based not cash-flow-based, accommodates covenant-flexible operations). Less expensive than bank LOC at high utilization (no commitment fees on drawn balance).

**Setup complexity:** Higher than factoring (2-4 week vs 7-14 day setup). Weekly/monthly borrowing base reports required. But once running, operationally simpler than per-invoice factoring.

**Best fit:** Established mid-market B2B with $5M-$50M revenue, diverse customer base, sufficient operational sophistication for borrowing base reporting. See /asset-based-lending for ABL specifics.