The pricing structures are not comparable on their face
A line of credit charges interest only on the drawn balance, for the days it is drawn, plus an annual or unused line fee. Factoring charges a percentage of invoice face value per 30 days, whether or not you needed all of that cash. That difference means a line of credit rewards low utilisation and fast repayment, while factoring costs roughly the same whatever your cash position, because it is tied to sales volume.
Same need, two prices
Consider a business invoicing $100,000 a month on 45 day terms and needing about $85,000 of working capital in continuous use.
Line of credit at 12 percent
- Interest on an $85,000 average balance: about $10,200 a year
- Annual facility fee: $500 to $1,500
- Unused line fee of 0.25 percent on a $150,000 limit: about $160
- Annual review and field exam where required: $0 to $3,000
- Total: roughly $11,000 to $15,000
Factoring at 2.5 percent per 30 days
- Factoring fee on $1.2 million of annual volume at 45 day terms: about $45,000
- Origination at 0.5 percent: $6,000
- Monthly minimum of $150: $1,800
- Wire fees on 240 invoices: $6,000
- Total: roughly $58,800
On these numbers the credit line costs about a quarter of what factoring costs. That is the typical result whenever both are genuinely available.
Why anyone chooses factoring anyway
Availability is the whole story. A bank line requires two or three years of profitable trading, tidy financials, a debt service coverage ratio usually above 1.25 and often a personal guarantee with collateral. Underwriting takes three to eight weeks. Factoring underwrites your customers rather than you, funds in three to ten days and stays available through a loss making year.
Factoring is the better answer when any of these are true:
- You are growing faster than a credit line limit can be raised. Factoring scales with sales automatically.
- Your business is under two years old or recently unprofitable.
- Your customers are large and slow paying but very creditworthy.
- You want the collections and credit checking function outsourced.
- You need non recourse protection against a specific customer failing.
The middle options people forget
- Asset based lending. A revolving facility secured on receivables and inventory, priced at roughly 8 to 16 percent plus monitoring fees. Cheaper than factoring and easier to obtain than an unsecured line, from about $1 million of revenue.
- Selective or spot factoring. Factor only the invoices you need to fund. The rate per invoice is higher, but the annual total is far lower than factoring the whole book.
- SBA 7(a) working capital. Term debt rather than revolving, capped between 9.75 and 13.25 percent in 2026, so much cheaper than either product if the timeline works.
- Supplier terms. Extending payables from 30 to 60 days is often free and removes part of the need entirely.
A decision rule that holds up
If you qualify for a line of credit and expect to use less than about 70 percent of it on average, the line wins on cost in almost every scenario. If you cannot qualify, or your funding need moves with sales volume more quickly than a limit can be renegotiated, price factoring honestly on an effective APR basis and check that the margin on the work being funded comfortably exceeds it. Many businesses run both, using a line for predictable needs and spot factoring for spikes.