Comparing invoice factoring vs. line of credit business financing is not a straight-up endeavor. Yet both offer flexibility and provide the means of financing business growth and expenses. Which is better for your business depends on how you weigh the pros and cons of each, so let’s take a closer look.
Invoice factoring vs. line of credit bank financing at a glance
| Invoice Factoring | Bank Line of Credit | |
| Financing fees | ~2-8% of invoice amount, one time fee* |
Prime rate plus, compounding, & usually variable |
| Low credit score OK | Yes | No |
| Available to startups | Yes | No |
| Speed of approvals | 24-48 hours | From a few to several weeks |
| Speed of funding | Same or next business day | From one to several days |
| Amount of funding available | 90-98% of invoice amount* | Depends on your company’s ability to repay, credit score, & so on |
| Learn more | How invoice factoring works | Line of credit types and rates |
*In most cases, the factoring companies we work with offer competitive factoring rates, including advances up to 98% and fees as low as 1-2%.
Pros and cons of invoice factoring compared to a bank line of credit
No single business finance tool is right for every scenario, financing need, or business. For example, bank loans are often instrumental in acquisitions; however, bank loans sizeable enough to fund the purchase of another business are often only available to large companies. One similarity of receivables factoring and a bank line of credit is that both can potentially be used selectively (e.g., spot factoring or selective factoring) and both can be used as micro financing tools.
Cost of factoring fees vs line of credit interest rates
Having an open line of credit can be ideal for covering unanticipated expenses or covering occasional cash shortages. But it comes at a price, including compounding, variable interest, so it should only be used when you anticipate being able to repay the amount right away. Likewise, for credit cards, and even more so, since interest rates are not only compounding but far higher.
Unlike the bank financing tools described above, invoice factoring has a more straightforward financing fee. It also doesn’t entail your business taking on debt, so it won’t affect your credit score. It’s also available to companies with receivables from day one. A low credit score doesn’t disqualify your business since factoring depends on the creditworthiness of your customers’ businesses, not yours.
Speed of approval and funding
Another plus of invoice factoring vs. line of credit business financing is the speed of approval and funding. You can get approved to factor invoices in 24-48 hours and go from approval to your first funding on the same day. When you factor invoices, you get same-day funding (or next-day funding based on the deadline for wired transactions).
With a bank loan or line of credit, getting approved can take weeks or even longer. It will require you to submit a significant number of documents, usually more than once, and may require you to periodically provide updated documentation such as bank statements, investment accounts, lists of assets, and so on. Once you have a line of credit in place, accessing funding can be as simple as using a debit card tied to the line of credit or may involve more stringent requirements, such as providing a business use case to justify the need.
What each can be used for
As far as invoice factoring vs line of credit use, both must be used for business purposes. However, once approved to factor a customer’s invoices, you won’t be required to tell the factoring company exactly what you plan to do with the money each time you factor. Bank financing rules may be more restrictive, depending on the financial institution and particulars of the business line of credit product. For more details, read our write up of bank financing compared to factoring.
Qualifying for a line of credit vs invoice factoring
Bank lines of credit have inherent disadvantages, especially for small businesses, startups, or distressed companies. Bank financing requires you to prove – essentially – that you have the ability to repay the amount. Banks will, therefore, evaluate your organization’s sales history, bank records, projections, investors, owned assets (that can be considered as collateral) and may even require you as the owner to provide personal guarantys, should your business’ assets not meet underwriting requirements.
In addition to being faster, qualifying for invoice factoring is far easier. The best invoice factoring companies will consider details about your company, however, for the most part, analysis will involve the creditworthiness of your customers. Factoring doesn’t put your organization in debt; instead, it gives you faster repayment of the money your customers owe you, which is why it’s also referred to as receivables financing.
Advantages of line of credit vs invoice factoring
If there’s a downside to invoice factoring compared to line of credit or other bank financing tools, it’s that you’re limited to the receivables you have on hand. This is because a line of credit, bank loan, or business credit card puts your organization in debt in order to give your business access to money it doesn’t otherwise have on the books.
Invoice factoring, on the other hand, is a debt-free business finance tool. It allows you to access the working capital represented in your company’s unpaid receivables without waiting for customers to pay. That same downside can also be considered an advantage, in that all of the things that can disqualify your business from a bank line of credit are negated, and factoring doesn’t put your company into debt or make its credit score go down.
Another potential negative for some organizations is that invoice factoring isn’t available to every type of business. To qualify, a business must have some form of receivable. This could be customer invoices like IT or cybersecurity consultants, business services agencies, temp staffing companies, and so on would have, but could also be government contracts, third party vendor earnings statements or sales reports (think app developers, Amazon seller factoring or Zulily merchants, or supply chain companies selling through big box outlets like Costco and Walmart).
Ready to learn more about invoice factoring? Reach out for a free, no-obligation quote or apply for invoice factoring online. We’ll source factoring proposals that are a good match to your company type, industry, and needs to help you get the best factoring finance program in place.
