Two tools, two questions
A line of credit lends you money against your business. A factor buys your invoices and pays you for them. The first depends on your history, your financial statements and often your personal credit; the second depends mostly on your customers' ability to pay. Our factoring vs. line of credit guide compares the two head to head on cost, approval and mechanics. This page starts from the other end: your situation, and which tool fits it.
What a bank asks for versus what a factor asks for
The lists are different enough that for many businesses only one of them is answerable.
A bank or SBA lender wants to see an operating history, financial statements, tax returns, a receivables aging, and in most cases a personal guarantee and collateral. The SBA's own description of its 7(a) Working Capital Pilot line says it is for businesses with at least one year of operating history that can produce timely and accurate financial statements and accounts receivable reports, and that it suits industries like manufacturing, wholesale and professional services (SBA — 7(a) loans). The maximum 7(a) loan is $5 million, and lenders are told to consider credit score, cash flow, equity and collateral at origination (SBA — Types of 7(a) loans).
A factor wants your customer list, your invoices and the paperwork that proves the work was done or the goods delivered. It will pull credit on your customers, run a lien search on you, and verify invoices with the customer before funding. Your own financials matter far less. Several factors we profile set up a new account in days: American Receivable says setup takes three to five days (American Receivable — FAQ); 1st Commercial Credit says first funding takes three to ten business days (1st Commercial Credit — FAQ).
Once set up, the difference in speed is larger still. The factors we profile mostly publish same-day or 24-hour funding; our fastest-funding list ranks them on what they publish. A bank line, once approved, is also fast to draw on, but the approval itself is measured in weeks, and the SBA cites a five to ten business day turnaround for its own review on non-delegated loans, on top of the lender's work (SBA — Types of 7(a) loans).
Decide by situation
You are new, with no financials yet
A bank has nothing to underwrite. You may get a small line on your personal credit, or a credit card, but not a facility sized to a real contract. A factor can fund your first invoice to a creditworthy customer in the first weeks of operation, because it is underwriting the customer. Several factors publish no minimum volume, which matters when your first month is one or two invoices; our startups and no-minimum list covers them. For a new trucking company the path is well worn; see our new authority guide.
Fit: factoring now, a line later. Treat the first year of factoring as the period in which you build the statements a bank will eventually ask for.
You are growing fast and your customers pay slowly
This is the classic factoring case, and the one where a line of credit disappoints even when you can get one. A bank line is sized at approval and reviewed annually. If your sales double in six months, your receivables double, your payroll and purchasing double, and your line stays the same. You go back to the bank for an increase and wait.
A factoring facility scales with your invoices. More approved invoices mean more funding, without a new credit decision on your business. The cost is higher per dollar, but it is a cost that only grows when revenue grows. A manufacturer landing a large retail account on net-60 terms, or a distributor adding a national customer, is often in exactly this position.
Fit: factoring, at least for the growth customers. Some businesses keep a small bank line for steady operations and factor the invoices from the new, large accounts.
Your business is seasonal
If your receivables swing from almost nothing to a peak and back, a fixed line sized for the peak sits mostly unused, and one sized for the average is too small when you need it. The SBA's Working CAPLine is the bank-world answer, an asset-based revolving line that businesses draw against existing assets and repay as their cash cycle dictates, intended for companies that sell on credit to other businesses (SBA — Types of 7(a) loans). It requires the same financials as any SBA line and more reporting, because the lender tracks the collateral.
Factoring is naturally seasonal: you pay only when you factor. The thing to avoid is a contract with a monthly minimum fee, which turns a seasonal facility into a year-round charge. Ask specifically, and favor factors that publish no minimums.
Fit: either, depending on whether you can carry the reporting a CAPLine needs. If not, factoring with no minimum.
You are bankable but need money this week
If you have two or three years of clean statements, good personal credit and collateral, you will probably qualify for a line, and over a year it will cost less than factoring. The question is timing. If a contract, a payroll or a supplier payment is due before a bank can close, factoring one or two invoices bridges the gap, and you can let the facility go quiet once the line is in place. Make sure the factoring agreement allows that: no minimum, no long term, no exit fee. Among the factors we profile, Liquid Capital publishes no long-term contract and no exit fees (Liquid Capital — FAQs), and Apex Capital publishes no long-term contract and no cancellation fee for carriers (Apex Capital — Freight factoring FAQ).
Fit: a short factoring bridge, then the line. Do not sign a one-year factoring contract to solve a one-month problem.
You have been factoring for years and want to graduate
Factoring for a long time is not a failure, but if your book has grown, your customers are strong and your statements are clean, you are a line-of-credit candidate and you are paying more than you need to. The steps are mechanical: get your statements reviewed or audited, assemble twelve months of receivables agings showing low dilution, and approach a lender while you are still factoring, so there is no gap. The factor will need to release its lien when the bank takes a first position; the buyout is the same process as switching factors, which our switching guide covers.
Some businesses never fully graduate. They keep a bank line for the bulk of their working capital and factor specific customers: the slow-paying national account, the new customer with no history, the foreign buyer. Running both is normal, but the two lenders must agree on who has rights to which receivables, usually through an intercreditor agreement.
Fit: a line for the core book, factoring for the exceptions, with the paperwork done in that order.
The personal guarantee question
Bank and SBA lines nearly always carry a personal guarantee from the owners, and SBA lenders are instructed to secure collateral and obtain the required lien positions (SBA — Types of 7(a) loans). Factoring agreements also commonly include a personal guarantee, but its scope is different: it typically covers your own representations, that the invoices are real and the work was done, and your obligations on recourse invoices, not the customer's credit. If keeping your house out of your business financing matters to you, read the guarantee clause of either agreement before comparing rates. Our contract guide explains the factoring version clause by clause.
A short checklist
Answer these honestly and the choice usually makes itself:
- Do you have at least one year of operating history and clean financial statements? If no, factoring.
- Are your customers larger and more creditworthy than you are? If yes, factoring will be easy to get and a line may not.
- Will your sales grow by more than half this year? If yes, factoring scales; a line will need to be renegotiated.
- Does your revenue swing by season? If yes, avoid any facility with a fixed monthly cost you cannot cover in the trough.
- Do you need money within a week? If yes, factoring now, and keep the contract short.
- Could you carry monthly collateral reporting to a bank? If yes and you are bankable, a Working CAPLine or asset-based line will be cheaper.
Our cost guide shows how to turn a factoring quote into an annual figure you can set next to a bank's rate, and the calculator does the arithmetic on a real invoice.
If factoring is the answer
Start from a shortlist rather than a search engine. The get-matched wizard takes your industry, state and monthly volume and shows the profiled factors that name your industry, serve your state and accept your volume, with what each publishes about fees, advances, minimums and contracts. For small and non-freight businesses the best factoring companies for small businesses list ranks on published terms and transparency. We connect you with a factor; the factor quotes your terms. We are paid by factors for introductions, never by you.
Frequently asked questions
Can I have a line of credit and a factoring facility at the same time?
Yes, and established businesses often do. The complication is collateral: both lenders want a security interest in your receivables. The usual solution is a carve-out or intercreditor agreement that assigns specific customers' invoices to the factor and the rest to the bank. Set that up before funding from both, or one of them will discover the conflict in a lien search.
How long should I factor before applying for a line?
Long enough to produce what the bank asks for: typically a full year of financial statements, tax returns and receivables agings that show your customers pay and your invoices are rarely disputed. The SBA's working-capital line, for example, is described as suited to businesses with at least a year of operating history and timely financial reporting. Many businesses find the second year of factoring is the right time to start the conversation.
Is a merchant cash advance a substitute for either?
No. A merchant cash advance is repaid from daily or weekly deductions regardless of whether your customers have paid you, and its cost is usually far above either factoring or a bank line. It is a last resort for businesses that cannot qualify for a line and do not have invoices to factor, such as retail or restaurants.
Will factoring hurt my chances of getting a bank line later?
Not in itself. Lenders see factoring on a lien search and in your statements, and they understand what it is. What matters is what the factoring history shows: steady customers, low dilution and a clean exit when you move. A long-term factoring contract with an expensive buyout can be a practical obstacle, so prefer short terms if you plan to graduate.