A factoring line (sometimes called a facility limit) is the maximum total value of invoices a factor will hold for a client at one time. It works much like the limit on a revolving credit line: as customers pay, room opens up for new invoices.
How it works in factoring
The factor sets the line based on the client's expected volume, the strength of its customers, its industry and the factor's own capacity. Within that overall line, individual customers usually have their own credit limits, and concentration limits may cap any single customer's share.
Illustrative example: A client has an assumed $250,000 factoring line. It currently has $210,000 of purchased invoices outstanding and submits $60,000 more. Only $40,000 fits under the line until customers pay down older invoices, unless the factor agrees to raise it.
Factoring lines are often increased as a client grows and builds a payment history. They may also be reduced if customers slow down or the client's risk changes.
A factoring line is different from a minimum volume requirement. The line sets the most the factor will fund; a minimum sets the least the client must factor or pay for.
What to check
- The size of the line compared with your expected peak volume, including seasonal peaks
- How to request an increase and how long it takes
- Whether the factor can reduce the line, and on what notice
- How the line interacts with per-customer credit limits and concentration limits
Running out of room on the line during a busy season can stall growth, so plan ahead with the factor.