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Is factoring better than a bank loan or line of credit?

Figuring out which financing program - invoice factoring, a bank loan, or a line of credit - is best for your business model can be tricky. There are several options that each come with its own set of strengths and weaknesses. So, how do you determine which solution is right for you?

It’s not uncommon for growing businesses to start experiencing a cash flow problem. Usually, the only way to improve a company’s cash on hand is by financing.

Figuring out which financing program - invoice factoring, a bank loan, or a line of credit -  is best for your business model can be tricky. There are several options that each come with its own set of strengths and weaknesses. So, how do you determine which solution is right for you?

The quick answer is that invoice factoring is easiest to get. Generally, factoring is an option available for most companies who work with customers with good standing commercial credit. In this article, we’ll summarize how each product works as well as the advantages and disadvantages. Understanding these financing options is the first step to making a smart decision.  

Invoice factoring

Factoring allows your business to sell its invoices to a factoring company that provides you with immediate cash flow while waiting for the customer to pay up. This is a great option for companies that are new, growing, or have financial issues. 

Factoring is seen as an alternative that gives cash against the value of open invoices in exchange for the ability to collect against them. The advantage here is that you can be approved in just 3-5 business days. 

While factoring fees can be slightly more expensive than the interest charged by banks, you don’t have to repay the cash you receive. 

Line of credit

Credit lines operate much like credit cards. The lending company gives you a maximum credit limit. When your business needs immediate assistance to pay expenses, you request a draw from the line, which provides funds, but reduces your available credit. 

However, qualifying for a line of credit is hard. You will pay interest regularly on money borrowed against the credit line. If that credit line is maxed out, you’ll have to apply for an extension with the bank, which can take several weeks. 

Bank loan 

With a loan, you receive a sum of money that you must repay in full. Loans are typically an intermediary between credit lines and factoring. They have limits, just like a line of credit, which is determined by how many accounts receivable you have. 

Loans also have covenants. Covenants are contractual obligations that you have to keep intact to continue getting loans. This means your company will be responsible for keeping certain financial ratios steady. 

What’s the best option? 

There is no best solution per se because each financing product is meant to solve a specific set of problems. However, factoring gives you an immediate fix to cash flow problems without putting your business in dept. 


When considering factoring, it’s important to work with a reputable factor with a good track record. Still not convinced about factoring your freight bills? Read why more and more transportation companies are turning to factoring here. The benefits and opportunities of immediate cash flow are endless, and InstaPay would love to be your factoring partner.

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