You sell on 30, 60, or 90-day terms, the work is good, the customers pay eventually, and yet payroll keeps arriving faster than your collections. Two tools fix that timing gap in very different ways: selling your receivables (invoice factoring) or drawing on a revolving line of credit. Here is how the two actually differ, what each costs, and a clear framework for choosing.

If you run a B2B company, your cash problem is rarely about whether the revenue is real. It is about the calendar. Your invoices are sitting in an aging report while suppliers, payroll, and rent run on a faster clock. When you go looking for capital to bridge that gap, you will keep hitting the same fork in the road: factor your invoices, or open a line of credit. They sound similar because both turn future cash into cash today, but they behave very differently on cost, on qualification, and on who ends up talking to your customers. This guide walks the decision the way an operator should, then points you to deeper pricing detail where it helps.

What is the difference between invoice factoring and a line of credit?

The core difference is that invoice factoring is a sale of an asset while a line of credit is a loan. With factoring, you sell your unpaid invoices to a third party (a factor) at a discount and collect most of the value upfront, so it is structured as a sale of receivables rather than new debt on your balance sheet. With a line of credit, you borrow against a revolving limit, draw what you need, pay interest only on the drawn balance, repay, and redraw, which keeps the obligation on your books as a liability.

A business line of credit is a revolving facility that lets you borrow up to a set limit, repay, and borrow again, paying interest only on the amount you have drawn at any given time. That redraw mechanic is the heart of it: a line is a reusable cushion you dip into and refill, not a lump sum you take once. Factoring, by contrast, advances cash invoice by invoice as you generate receivables, so the capital available rises and falls with your billing rather than sitting at a fixed limit.

For a deeper look at how factoring itself prices, including advance rates, reserves, and recourse versus non-recourse structures, see our companion guide, Invoice Factoring in 2026: Rates, Advance Rates, and When It Beats a Loan. This article focuses specifically on the factoring-versus-line-of-credit choice.

How does each one actually work?

Factoring and a line of credit move money to you through opposite mechanics: one sells the receivable, the other lends against your business. Understanding the plumbing of each is what makes the cost and control trade-offs make sense.

With invoice factoring, you sell a batch of invoices to the factor. The factor advances a percentage of face value upfront (the advance rate), holds the rest in reserve, and releases that reserve, minus its fee, once your customer pays. Advance rates commonly run about 80% to 90% of invoice value, with freight programs sometimes reaching up to 100%, and factoring fees commonly run about 1% to 5% of invoice value, according to altLINE (Southern Bank). Critically, the factor underwrites your customers’ credit, not just yours, because it is buying the right to collect from them, and in most arrangements your customer is notified and pays the factor directly.

With a line of credit, the lender approves a revolving limit based on your business, not your customers. You draw funds as needed, pay interest on the drawn balance, and repay to free the limit back up. There is no customer notification and no change to who collects: you keep billing and collecting your own receivables exactly as you do today. The flexibility is the point, but so is the discipline, because a line that is always maxed out is no longer a cushion.

How much does each one cost?

The two price on different units, which is why a head-to-head comparison takes a little translation. A line of credit is priced as an interest rate (an APR) on the balance you draw, while factoring is priced as a fee per invoice cycle. To compare them honestly, you have to annualize the factoring fee against how long your invoices actually take to pay, then set it beside the line’s APR for the same working capital over the same period.

For a line of credit, bank business-loan rates ran roughly 6.8% to 11% in the fourth quarter of 2025, according to NerdWallet, citing Federal Reserve data. Those rates move with the broader rate environment: the prime rate was 6.75% as of the June 26, 2026 Federal Reserve H.15 release, per the Federal Reserve. Lines from online and non-bank lenders generally run significantly higher than bank pricing, so where you get the line matters as much as the headline rate. Treat every figure here as a market range as of late 2025 and mid-2026, not a quote, and never as a Capital Source or Stretch Finance rate.

For factoring, the cost is the per-cycle fee on the invoices you sell. The subtlety that catches operators off guard: a fee that looks small on a single 30-day invoice annualizes higher when the receivable takes 60 or 90 days to clear. That collection time has a name, days sales outstanding (DSO), which is the average number of days it takes to collect on an invoice after the sale. The longer your DSO, the more a per-invoice factoring fee adds up, because you pay for the full period the invoice is outstanding. On recourse versus non-recourse, non-recourse factoring costs more (typically higher fees or lower advances) because the factor takes on the risk of an approved customer’s insolvency, per NerdWallet. Our factoring pricing guide works through that annualization in detail.

Factoring vs line of credit: a side-by-side comparison

Here is the decision in one view. The table below sets the two tools against the dimensions that usually decide the choice: what kind of capital it is, how it is priced, who gets underwritten, who collects, and how it scales.

Which is easier to qualify for?

Factoring and a line of credit clear different bars, which is often the deciding factor for younger companies. Factoring is underwritten primarily on your customers’ creditworthiness, so a young or thinly capitalized business with strong, slow-paying enterprise clients can frequently factor even when it cannot yet qualify for a conventional line. A line of credit is underwritten primarily on your business, so it tends to favor companies with an established track record, clean financials, and a solid credit profile.

Access to bank credit is not automatic for smaller firms. In the Federal Reserve Banks’ 2026 Report on Employer Firms (2025 Small Business Credit Survey), among firms that applied for financing, 42% received the full amount they sought while 22% received none, and small banks fully approved 57% of applicants, per the Federal Reserve Banks. When a fixed line is hard to secure or slow to expand, financing anchored to invoices you have already earned can keep capital moving.

Why does this choice matter so much in 2026?

It matters because slow payment is widespread and the cash gap it creates is exactly what both tools are built to close. In the Atradius Payment Practices Barometer for the US in 2025, average B2B payment terms ran about 45 days, roughly half of B2B sales were made on credit, and across outstanding B2B invoices 52% were paid on time, 43% were overdue, and 5% were written off as uncollectable, per Atradius (survey conducted in 2025, published September 2025).

The driver behind the delays is telling: the most-cited reason for late payment was customers’ own liquidity issues, named by 45% of businesses surveyed, according to Atradius. In other words, your cash gap is often a chain reaction from your customer’s cash gap. To bridge it, the same survey found firms leaning on a mix of tools, with about 68% using bank loans and 57% using invoice financing. The takeaway is not that one tool wins outright. It is that the smart move is matching the tool to the shape of your specific gap.

How do you choose: a founder’s decision framework

The right choice comes down to where your cash gap sits, what your balance sheet looks like, and how much control over customer contact you want to keep. Use the signals below as a starting point, then run the actual cost both ways before deciding.

Factoring tends to win when:

• Your DSO is high and your terms are long. If customers routinely pay on net-60 or net-90, factoring is purpose-built to bridge that wait invoice by invoice.
• You are young, fast-growing, or thinly capitalized but your customers are creditworthy. Factoring leans on your account debtors’ strength, so it can be accessible when a conventional line is not.
• Your need scales with sales. As you invoice more, more receivables become available to finance, so capital grows with revenue instead of capping at a fixed line.
• You are comfortable with customer notification. In most factoring arrangements the factor collects from your customers directly, so this works best when that contact is not a concern.

A line of credit tends to win when:

• You have established financials and credit. A track record and clean books make a revolving line accessible and often the cheapest flexible capital available.
• You want to keep collections in-house. A line involves no customer notification, so you keep full control of billing and the customer relationship.
• Your needs are lumpy or not tied to receivables. For uneven, one-off, or non-invoice expenses, a reusable limit you draw on as needed fits better than per-invoice financing.
• You have high customer concentration. If a large share of your receivables sits with one or two account debtors, a line underwritten on your business can be steadier than financing tied to those few customers.

And it is not always either-or. Many operators use both: a line of credit for general, lumpy, or non-receivables needs, and factoring to convert long-dated invoices into cash as they are generated. The two can complement each other when each is pointed at the part of the cash cycle it handles best.

Where Capital Source fits

At Capital Source, we start with how your money actually moves, your receivables, your terms, your seasonality, and your balance sheet, then structure capital around that cycle rather than pushing you into a single product. Through our affiliate, Stretch Finance, we can look at both paths and help you weigh the factoring-versus-line decision on the facts of your business. We do not promise a specific rate, advance, or outcome here; structure and terms depend on your business, your customers, and underwriting review.

Key takeaways

• Sale versus loan. Factoring is structured as a sale of receivables; a line of credit is revolving debt you draw, repay, and redraw.
• Different units of cost. Factoring fees run commonly about 1% to 5% of invoice value per cycle (altLINE), while a line is priced as an APR; bank business-loan rates ran about 6.8% to 11% in Q4 2025 (NerdWallet citing Federal Reserve). Annualize before comparing.
• Different underwriting. Factoring leans on your customers’ credit; a line leans on your business, which is why younger firms with strong clients often factor first.
• Control and contact differ. Factoring usually means customer notification and the factor collecting; a line keeps collections and customer contact in-house.
• Match the tool to the gap. Factoring fits high-DSO, receivables-linked growth; a line fits established firms, lumpy needs, and high customer concentration. Many businesses use both.

Frequently asked questions

Sources

• altLINE (Southern Bank), Invoice Factoring Rates Explained.
• NerdWallet, Average Business Loan Interest Rates (citing Federal Reserve data, Q4 2025).
• NerdWallet, Recourse vs. Non-Recourse Factoring.
• Board of Governors of the Federal Reserve System, Selected Interest Rates (H.15) (prime rate as of June 26, 2026).
• Atradius, Payment Practices Barometer United States 2025 (published September 2025).
• Federal Reserve Banks, 2026 Report on Employer Firms (2025 Small Business Credit Survey, published March 2026).

This article is for informational and educational purposes only and does not constitute financial, investment, accounting, tax, or legal advice. The concepts discussed are general in nature and should be reviewed with qualified professionals based on your specific circumstances. Rate and fee figures are drawn from the cited sources and reflect general market ranges as of their respective reporting periods, not a quote or a Capital Source or Stretch Finance offer. Capital Source provides access to commercial financing solutions through its affiliates, syndicates, network of banks, lending partners, and private credit funds/groups. Availability, approval, funding amount, structure, and terms are subject to business review, underwriting, and lender approval.