If your cash gap comes from slow-paying customers, invoice factoring usually fits best; if you need a flexible reserve to cover mixed, recurring expenses on your own schedule, a line of credit is typically the better match. Both are working-capital tools rather than long-term loans, but they solve different problems and are underwritten in very different ways. This guide breaks down how each works, what they cost, who qualifies, and how to decide.
Key takeaways
- Invoice factoring turns unpaid B2B invoices into immediate cash; a line of credit is a reusable credit limit you draw on as needed.
- Factoring underwriting weighs your customers' creditworthiness heavily, while a line of credit weighs your own revenue and business credit.
- With factoring, your customer pays the factor; with a line of credit, you repay the lender and keep collections in-house.
- A line of credit charges interest only on the amount drawn, and the limit replenishes as you repay.
- Common baselines: about $10,000+ in monthly revenue, FICO 500+, with decisions often in 24-48 hours; nothing is guaranteed.
- MCA relief means lowering your daily or weekly payment to ease cash flow — not a payoff or buyout of the advance.
- Choose factoring for slow-paying invoices; choose a line of credit for recurring or unpredictable expenses you want to control.
How each one works
Invoice factoring is the sale of your unpaid B2B invoices to a factoring company at a discount. You deliver goods or services, issue the invoice, then sell it to the factor. The factor typically advances a large share of the invoice value up front, collects payment from your customer when the invoice comes due, and releases the remaining balance to you minus its fee. Factoring is tied directly to invoices you have already earned, so the amount of funding scales with your receivables.
A business line of credit is a revolving credit limit you can draw from as needed. You borrow only what you use, pay interest only on the outstanding balance, and as you repay, the available credit replenishes. It is not tied to any specific invoice or purchase — you decide when and how to use it, whether that is covering payroll, buying inventory, or bridging a slow month.
The core distinction: factoring converts existing receivables into immediate cash, while a line of credit is a standing reserve you tap on your own terms and repay over time.
Side-by-side comparison
| Feature | Invoice Factoring | Line of Credit |
|---|---|---|
| What it funds | Unpaid B2B invoices you've already issued | Any business expense, at your discretion |
| Funding amount | Scales with your outstanding receivables | Set credit limit approved in advance |
| Cost structure | Factoring fee (discount) per invoice | Interest on the drawn balance, sometimes a draw or maintenance fee |
| Who repays / collects | Your customer pays the factor | You repay the lender |
| Credit emphasis | Weighs your customers' creditworthiness heavily | Weighs your business's credit and revenue |
| Reusable? | Per invoice — factor each one as needed | Yes — revolving; replenishes as you repay |
| Best for | Slow-paying invoices, long net terms | Recurring or unpredictable expenses |
| Typical requirement | Creditworthy commercial customers | Consistent revenue and business credit history |
Figures such as advance rates, fee percentages, and credit limits vary by provider, industry, and your business profile. The table describes structure, not a specific offer.
Cost example: factoring
Here is an illustrative, labeled example — not a quote. Suppose you invoice a commercial customer for $40,000 on net-60 terms and you don't want to wait two months for payment.
- Invoice amount: $40,000
- Advance rate (example): 85% → $34,000 paid to you up front
- Factoring fee (example): 3% of the invoice → $1,200
- Reserve released when customer pays: $40,000 − $34,000 − $1,200 = $4,800
- Total you receive: $38,800 on a $40,000 invoice
Your cost in this example is the $1,200 fee in exchange for getting most of the cash roughly two months early. Fees may be flat or tiered by how long the invoice stays outstanding.
Cost example: line of credit
Another illustrative example. Suppose you're approved for a $50,000 line of credit and you draw part of it to cover a seasonal inventory purchase.
- Approved credit limit: $50,000
- Amount drawn: $20,000
- Interest charged on: only the $20,000 drawn — not the full $50,000
- Undrawn $30,000: available at any time, at no interest until used
- As you repay: the limit replenishes back toward $50,000 for future draws
The value here is flexibility: you pay for what you use, keep the rest in reserve, and reuse the facility without reapplying. Interest rates and any draw or maintenance fees depend on the lender and your qualifications.
Choose invoice factoring if… / Choose a line of credit if…
Choose invoice factoring if:
- Your cash gap is caused specifically by slow-paying B2B customers on net-30, net-60, or net-90 terms.
- You invoice creditworthy commercial or government clients.
- Your own business credit is limited but your customers are strong payers.
- You'd rather not add debt to your balance sheet and are comfortable with the factor collecting from your customers.
- Your funding need grows in step with your sales and receivables.
Choose a line of credit if:
- Your expenses are recurring, mixed, or unpredictable — payroll, rent, inventory, emergencies.
- You want a reserve you control and can draw on at will, not tied to any invoice.
- You have consistent revenue and a reasonable business credit profile.
- You prefer to keep your customer relationships and collections entirely in-house.
- You value a reusable facility you can tap repeatedly without reapplying.
Qualifying and how to apply
Requirements differ by product and provider, but common baselines for working-capital products in this market include roughly $10,000 or more in monthly revenue, a personal credit score of FICO 500+, and time in business that shows a track record. Factoring underwriting leans on the credit quality of the customers behind your invoices, while a line of credit leans more on your own revenue consistency and business credit history.
Documentation is usually light: recent bank statements, and for factoring, your accounts-receivable aging and sample invoices. Decisions on many working-capital products can come back in about 24-48 hours, though timelines vary and no approval is ever guaranteed. Approval, terms, and pricing depend on your full application and the provider's review.
A note on existing MCA payments
If a merchant cash advance is straining your cash flow, be clear about what relief means. MCA relief in this context refers to lowering your daily or weekly payment to ease the strain on cash flow — it is not a payoff, buyout, or settlement of the advance. Neither invoice factoring nor a line of credit eliminates an existing obligation; they are financing tools for cash flow, evaluated on their own terms. Weigh how any new payment interacts with obligations you already carry.
Frequently asked questions
Is invoice factoring a loan?
No. Factoring is the sale of your unpaid invoices to a factoring company at a discount, not borrowed money you repay. Because it isn't structured as debt, underwriting focuses heavily on the creditworthiness of the customers who owe you, rather than only on your own credit.
Can I use both a line of credit and factoring?
Sometimes, depending on the providers and any agreements involved. A line of credit can cover general expenses while factoring handles slow-paying invoices. Because a factor may hold a claim on your receivables, disclose any existing facilities so terms don't conflict. Any combination depends on approval and the specific agreements.
Which is cheaper, factoring or a line of credit?
It depends on how you use each. Factoring costs a fee per invoice and is efficient when the alternative is waiting months for payment. A line of credit charges interest only on what you draw, which can be economical for smaller, short-term needs. Compare the total cost against how long you'd otherwise wait for cash.
Do my customers know I'm factoring their invoices?
Often yes, because the factor typically collects payment directly from your customers, which can make the arrangement visible to them. Some arrangements are more discreet than others. If keeping collections in-house matters to you, a line of credit keeps customer relationships entirely under your control.
What are the basic requirements to apply?
Common baselines in this market are around $10,000 or more in monthly revenue and a personal credit score of FICO 500+, along with a track record in business. Factoring also depends on having creditworthy commercial customers behind your invoices. Requirements vary by provider, and no approval is guaranteed.
How fast can I get funded?
Decisions on many working-capital products can come back in roughly 24-48 hours, with funding to follow, though timelines vary by provider and how complete your application is. Factoring can be quick to set up when your invoices and customer credit check out. Speed is never guaranteed and depends on the review.
