When customers pay in 30 to 60 days but your bills do not wait, two tools come up: invoice factoring and a business line of credit. They both bridge cash-flow gaps, but they qualify differently, cost differently, and suit different businesses. Here is how they compare.
How invoice factoring works
With factoring, you sell an unpaid invoice to a factor, which advances a large percentage — commonly 80 to 95 percent depending on industry — within a day, then collects from your customer and releases the reserve (less its fee) when they pay. Approval rides mainly on your customers' creditworthiness, not your own, so newer and credit-challenged businesses can often qualify. Funding scales automatically with your sales.
How a business line of credit works
A line of credit is a revolving limit you draw from as needed and repay, paying interest only on what you use. It is flexible and not tied to specific invoices, but it is a credit product: qualifying depends on your business and personal credit, time in business, and financials, and banks often want two-plus years of history and strong credit. Limits and renewals depend on the lender's ongoing review.
Qualifying: the biggest difference
This is where the two diverge most. A line of credit is underwritten on you — your credit and financial strength. Factoring is underwritten on your customers — are the businesses you invoice creditworthy and is your billing clean. A company with slow-paying but blue-chip customers and thin credit may not get a line of credit but can often factor. A company with strong credit and no receivables to sell is a better fit for a line.
Cost and flexibility
A line of credit typically costs less per dollar when you qualify, and you only pay for what you draw. Factoring costs a fee per invoice but requires no credit strength and delivers cash immediately against receivables you already hold. A line is more flexible for general use; factoring is purpose-built for turning receivables into cash and scales with revenue without a new approval each time.
Which fits your business?
If your problem is specifically slow-paying customers and you have creditworthy receivables, factoring solves it at the source — and it is available even without strong credit. If you have strong credit and want flexible, lower-cost access to capital for general needs, a line of credit fits. Some businesses use both. Y Millennial Funding offers factoring and revenue-based funding for businesses doing $50,000 or more in monthly revenue. Factoring is the purchase of receivables, not a loan. Not all applicants qualify.