The core difference
A line of credit is a loan. A bank lends you money up to a limit, you pay interest on what you draw, and the bank's decision rests mainly on your business: its profits, cash flow, balance sheet, history and owners.
Factoring is a sale. A factor buys your invoices at a discount, collects from your customers, and its decision rests mainly on your customers' ability to pay. Our guide on how factoring works covers the mechanics in full.
Almost every practical difference between the two flows from that split. It explains why a two-year-old company that cannot get a bank line can often factor, why factoring usually costs more per dollar, and why a bank line comes with covenants and reporting that factoring mostly does not.
Approval: whose credit counts
| Question the funder asks | Bank or SBA line of credit | Factoring |
|---|---|---|
| Main credit focus | Your business and its owners | Your customers |
| Time in business | Usually a meaningful track record | Can be very new if customers are strong |
| Profitability | Usually required, with cash flow to cover debt | Less important; losses are not automatically disqualifying |
| Personal guarantee | Commonly required from owners | Often required too, but usually narrower in practice |
| Collateral | Receivables, often inventory and other assets | The purchased invoices themselves |
| What limits the size | Bank's view of your capacity to repay | Your sales volume and customers' credit limits |
The last row matters for growing companies. A bank line is set at a fixed limit, and raising it means going back to underwriting. Factoring capacity rises automatically with sales, provided the new customers are creditworthy.
Cost structure: discount fee vs. interest
A line of credit charges interest at an annual rate on the balance you actually use, for the days you use it, often plus an annual or unused-line fee. Most business lines float with an index, commonly the prime rate. The Federal Reserve's H.15 release showed the bank prime loan rate at 7.00% for each business day from October 26 to October 30, 2026, in the release dated November 2, 2026.
Factoring charges a discount fee, a percentage of each invoice's face value, either flat or rising with the number of days the invoice stays unpaid. A fee of a few percent sounds small next to an interest rate, but it applies to a period of weeks, not a year. To compare the two you need to annualize the factoring cost.
How to compare: effective APR
A simple way to put a factoring fee on the same footing as interest is:
Effective APR = (total fees ÷ cash advanced) x (365 ÷ days the invoice was outstanding)
Two details in that formula matter:
- Use the cash advanced as the denominator, not the invoice face value. You only have use of the advance. The reserve is your money that the factor holds, so you are not getting financing on it.
- Include every charge in total fees: the discount fee plus wire, ACH, processing, verification or monthly service fees allocated to the invoice. Leaving them out flatters the factoring number.
This is a simple annualization for comparison, not a regulated disclosure. Formal APR methods, such as the one used under the federal Truth in Lending Act's Regulation Z, can give slightly different figures.
A worked comparison
The figures below are illustrative, chosen to show the method. They are not a quote or a market average.
Your business has a $100,000 invoice outstanding. The customer will pay in 40 days.
Option 1: factor it. The factor advances 90%, or $90,000, and charges a flat 2.5% fee, or $2,500.
- Fee as a share of the cash advanced: $2,500 ÷ $90,000 = 2.78%
- Annualized: 2.78% x (365 ÷ 40) = 2.78% x 9.125 = about 25.3% effective APR
Option 2: draw on a line of credit. You borrow the same $90,000 for 40 days. Assume a rate of 10.00%, which is the 7.00% prime rate above plus a 3.00% spread. That spread happens to match the maximum variable spread SBA allows on 7(a) loans over $350,000, discussed below; your own bank's pricing could be higher or lower.
- Interest: $90,000 x 10.00% x (40 ÷ 365) = $986.30
On these numbers the line of credit costs about $1,514 less for this one invoice. That gap is the price of the things factoring provides and the line does not: approval based on your customer's credit, no covenants, capacity that grows with sales and, depending on the agreement, collection work and some credit protection.
Two cautions run the other way. First, an unused line is rarely free: annual fees, unused-line fees and the cost of the reporting work all add to what you pay, and they should be spread over the amount you actually borrow. Second, the factoring APR depends heavily on payment speed. The same 2.5% fee on an invoice paid in 20 days doubles the annualized figure, while a tiered fee on a fast-paying customer can come out cheaper than the flat fee. Run your own invoices through the factoring calculator and annualize the result.
New York requires an APR for many factoring offers
New York's commercial finance disclosure law treats factoring as a form of commercial financing. Financial Services Law section 806 requires a provider making a specific factoring offer to disclose the purchase price, the finance charge, the total payment and an estimated annual percentage rate calculated under Regulation Z as a single-advance, single-payment transaction. Section 802 exempts, among others, financial institutions, individual transactions over $2.5 million, and providers that make five or fewer commercial financing transactions in the state in a 12-month period. If you are in New York and receive a factoring offer without an estimated APR, ask why.
Collateral, covenants and the borrowing base
A bank line is usually secured by a lien on your receivables and often on inventory, equipment and other business assets. The amount you can draw at any moment is set by a borrowing base: an agreed percentage of eligible receivables, sometimes plus a percentage of eligible inventory. Receivables older than a set age, owed by affiliates, from foreign customers or concentrated in one customer are often excluded as ineligible.
On top of that sit covenants, the ongoing promises in the loan agreement. Typical examples include minimum profitability or debt coverage, limits on other borrowing, restrictions on owner distributions, and regular reporting such as monthly borrowing base certificates and annual financial statements. Breaking a covenant can let the bank freeze the line or demand repayment, often at the moment you most need the money.
Factoring has its own controls, such as credit limits on each customer, verification of invoices and, in whole-ledger agreements, minimum volumes. It rarely has financial covenants on your business, because the factor is relying on the invoices rather than on your performance. The trade-off is that the factor files a UCC-1 against your receivables, and sometimes against all assets, so check the scope as our guide on how to read a factoring contract explains.
SBA lines of credit: 7(a) and CAPLines
The Small Business Administration does not usually lend directly. It guarantees part of loans made by participating lenders, which lets them extend credit to businesses they might otherwise decline. Several SBA programs work as lines of credit.
- CAPLines is SBA's umbrella program for short-term and cyclical working capital. It includes a Working CAPLine, described as an asset-based revolving line for businesses that cannot meet long-term credit standards and repaid as short-term assets convert to cash; a Seasonal CAPLine for seasonal increases in receivables, inventory or labor; a Contract CAPLine for costs of specific contracts; and a Builders CAPLine for small contractors building or renovating property for sale. SBA states CAPLines maturities of up to 10 years, except Builders, which is capped at 60 months plus the estimated construction time.
- The 7(a) Working Capital Pilot offers monitored lines of credit up to $5,000,000 with a maximum maturity of 60 months, according to SBA's 7(a) loans page.
- General 7(a) terms. SBA lists a maximum 7(a) loan of $5 million. Its guaranty is up to 85% for loans of $150,000 or less and up to 75% above that.
SBA caps the interest rates lenders may charge. Maximum variable rates are pegged to the prime rate or an optional peg rate, plus a spread that depends on loan size:
| Loan amount | Maximum variable rate |
|---|---|
| $50,000 or less | Base rate + 6.5% |
| $50,001 to $250,000 | Base rate + 6.0% |
| $250,001 to $350,000 | Base rate + 4.5% |
| Over $350,000 | Base rate + 3.0% |
Lenders may also charge an upfront guaranty fee, which SBA publishes each year. SBA lines still involve underwriting of your business and its owners, collateral where available, and lender reporting, so they share most of a bank line's advantages and most of its demands.
Speed
Factoring is usually faster to open. Underwriting focuses on your customers and your paperwork, and a factor can often fund the first invoices within days to a couple of weeks once the UCC search is clean and customers have been notified.
A bank or SBA line typically takes longer: financial statements, tax returns, collateral review and credit committee approval. Once it is open, though, drawing on it is often a same-day transfer with no invoice-by-invoice verification, which can make day-to-day use faster than factoring.
When each one wins
A line of credit usually wins when:
- Your business is profitable, has a few years of clean financials and can meet covenants comfortably.
- Your need is modest relative to your balance sheet and does not grow sharply with sales.
- You want your customers to keep paying you directly with no notice of assignment.
- Your margins are too thin to absorb a per-invoice discount fee.
Factoring usually wins when:
- Your business is young, recovering from losses or growing faster than a bank will follow.
- Your customers are stronger credits than you are.
- You have been declined for a line, or offered one too small to cover your receivables.
- You value collection support or customer credit checks, or want non-recourse protection against a customer's insolvency. Our recourse vs. non-recourse guide covers what that protection includes.
A common path is to factor while the business is young or growing quickly and move to a bank line once it has the track record. If you plan to do that, avoid long factoring terms and steep early-exit fees. Our guide on how to switch factoring companies covers the exit mechanics.
Using both at once
Some businesses run a bank line and factor some invoices at the same time, for example factoring one slow-paying government customer while the bank finances everything else. It can work, but only with both funders' agreement.
The problem is the lien. A bank line is almost always secured by your receivables. If you sell some of those receivables to a factor without the bank's consent, you will likely breach the loan agreement, and the bank's earlier UCC filing may give it priority over the factor's claim to the same invoices. In practice a factor will not fund until the conflict is resolved, which usually means one of these:
- A carve-out. The bank releases its lien on the specific customer's receivables, and those invoices drop out of the borrowing base.
- A subordination agreement. The bank agrees that the factor's interest in defined receivables comes ahead of its own.
- An intercreditor agreement. A fuller document setting out which funder has first claim on which assets, how payments are routed, and what each may do if you default.
Expect these negotiations to take time and legal fees, and expect the bank to reduce your borrowing base for any receivables it releases. Make sure the factor's UCC-1 is limited to the receivables it actually buys; an all-assets filing from the factor is likely to conflict with the bank's position on everything else.
Frequently asked questions
Is factoring more expensive than a line of credit?
On an annualized basis it usually is, often by a wide margin, because the fee covers a few weeks rather than a year. Compare by converting the factoring fee to an effective APR using the cash advanced and the actual days outstanding, and remember to include all fees on both sides.
Can I get a line of credit if I am already factoring?
Yes, but the factor's UCC filing and purchase rights will need to be resolved first. Most banks will either pay off the factor and take over the receivables or require an intercreditor agreement. Check your factoring contract's termination terms before applying.
Does factoring require a personal guarantee?
Many factoring agreements include one, often called a validity or performance guarantee, which covers fraud, misrepresentation and breaches of the agreement rather than customer non-payment. Read the scope carefully, because some guarantees are much broader.
What is the current prime rate?
The Federal Reserve's H.15 release dated November 2, 2026 showed the bank prime loan rate at 7.00% for October 26 to October 30, 2026. The release is updated every business day, so check the latest figure before relying on it.
Are SBA lines of credit better than factoring?
For a qualifying business they are usually cheaper, because SBA caps the interest rate spread. They also require underwriting of your business and owners, collateral where available, and ongoing reporting. Businesses that cannot meet those requirements, or need funding within days, often factor instead.