Authored by Phil Cohen
Invoice factoring is a better choice than a line of credit when cash flow problems are caused by slow-paying customers, rapid growth, or timing gaps rather than lack of profitability.
Both tools provide working capital, but they solve different problems. Choosing the wrong one can increase stress, restrict growth, or create unnecessary risk. This guide explains when factoring is the better fit and why.
Why Businesses Compare Factoring and Lines of Credit
Most businesses turn to financing for one of three reasons:
cash is tied up in unpaid invoices
expenses must be paid before revenue is collected
growth requires upfront spending
Lines of credit and invoice factoring both provide access to cash, but they behave very differently once a business begins to scale.
What a Line of Credit Is Designed to Do
A line of credit is a fixed borrowing limit based on:
business credit history
financial statements
collateral or guarantees
lender risk tolerance
It works best when:
cash needs are occasional
revenue is stable
payment timing is predictable
growth is moderate
borrowing is temporary
Lines of credit are best suited for short-term smoothing, not structural cash gaps.
What Invoice Factoring Is Designed to Do
Invoice factoring is a receivables-based funding model.
It works by:
advancing cash against issued invoices
converting receivables into immediate liquidity
scaling funding as invoice volume increases
aligning cash availability with sales activity
Factoring is designed for businesses where timing, not profitability, is the core issue.
When a Line of Credit Starts to Fail
Lines of credit often stop working when:
customers pay in 30 to 60 days
payroll and vendors must be paid weekly
growth accelerates quickly
receivables grow faster than cash
credit limits are consistently maxed out
At this point, the problem is not access to credit.
The problem is that the credit tool no longer matches the business model.
When Invoice Factoring Makes More Sense
Invoice factoring is often the better option when the following conditions exist.
You Have Long Payment Terms
If customers routinely pay in Net 30, Net 45, or Net 60:
cash is locked in receivables
lines of credit are used constantly
borrowing becomes permanent instead of temporary
Factoring removes payment timing from the equation by converting invoices into cash immediately.
Your Business Is Growing Faster Than Credit Limits
Lines of credit are capped.
As revenue grows:
receivables increase
payroll and expenses rise
credit availability stays the same
Factoring scales automatically with invoices, removing the need to renegotiate limits during growth.
Your Credit Is Strong, but Cash Is Still Tight
Many businesses qualify for a line of credit and still struggle with cash flow.
This usually means:
profitability is not the issue
timing is the issue
receivables are the bottleneck
Factoring addresses the bottleneck directly instead of adding more debt.
You Need Cash Predictability, Not Just Access
Lines of credit provide access to cash but not certainty.
Factoring provides:
predictable funding tied to sales
consistent cash availability
reduced dependence on lender discretion
Predictability is often more valuable than a lower interest rate.
You Want Funding Tied to Sales Activity
Lines of credit are based on past performance.
Factoring is based on:
invoices issued
customers’ ability to pay
current sales volume
This makes factoring more responsive to real-time business activity.
You Want to Avoid Overleveraging
Lines of credit increase debt.
Factoring:
does not add traditional debt
does not require long-term repayment schedules
converts an existing asset into cash
For businesses managing risk carefully, this distinction matters.
When a Line of Credit Is Still the Better Option
A line of credit may be better when:
customers pay quickly
cash gaps are infrequent
growth is slow and predictable
borrowing is occasional
the business wants the lowest possible cost of capital
cash needs are unrelated to receivables
In these cases, factoring may be unnecessary.
Why Many Businesses Use Both at Different Stages
Many companies evolve through phases.
Early stage:
line of credit covers occasional gaps
Growth stage:
receivables expand
timing gaps widen
factoring becomes more effective
Later stage:
improved liquidity allows renegotiation of credit options
The right tool depends on where the business is today, not where it was last year.
Common Mistakes When Choosing Between the Two
Choosing the cheapest option instead of the right one
Using a line of credit to permanently fund receivables
Ignoring how funding scales during growth
Waiting until limits are exhausted before acting
Treating cash flow stress as a credit problem
These mistakes increase risk and reduce flexibility.
Key Takeaways
Lines of credit are fixed and backward-looking
Invoice factoring scales with invoices and sales
Factoring solves timing problems, not profitability problems
Growth exposes the limits of traditional credit
Predictable cash flow often matters more than interest rate
The best choice depends on payment terms and growth pace