What is a business line of credit and how does it compare to invoice factoring?

A business line of credit works like a credit card: you have a maximum limit, you draw what you need, and you repay it over time. Interest accrues on the drawn balance only, typically at a rate between 8% and 25% APR depending on the lender and the borrower's credit profile. Unlike a term loan, you do not receive all the money at once or pay interest on amounts you have not drawn.

Approval requirements are more stringent than invoice factoring. Most banks and credit unions require at least 2 years of business history, consistent revenue (typically $100,000+/year), and good personal credit (680+). Online lenders (Kabbage, OnDeck, Bluevine) have lower bars but higher rates. A business with an uneven revenue history or a recent incorporation will often struggle to qualify.

The advantage over invoice factoring is cost: a 15% APR line of credit is cheaper than 3% per 45-day invoice (which annualizes to ~24%). The disadvantage is availability: businesses that need factoring often cannot qualify for a credit line, and credit lines take weeks to arrange while factoring can fund in 24–48 hours.

Lines of credit are general-purpose; factoring is specific to AR. A profitable business with lumpy cash flow (e.g., project-based work with 90-day payment terms) may hold both: a line of credit for operating expenses and factoring for specific large receivables where the client's creditworthiness is high and the discount fee is justified by the acceleration.