Invoice factoring sells specific invoices for an advance. An A/R line of credit is a revolving facility tied to your eligible receivables, so you draw what you need when you need it. Both turn money your customers owe you into cash today. They differ in how you use them, what they are based on, and which businesses they fit best.
The two options side by side
| Invoice factoring | A/R line of credit | |
|---|---|---|
| What it is | A sale of unpaid invoices for an immediate advance. | A revolving facility tied to your receivables. |
| How you use it | Submit the invoices you want turned into cash. | Draw what you need, when you need it, and repay as customers pay. |
| What it is based on | The creditworthiness of your customers. | Your eligible receivables and billings. |
| Choosing invoices | Most arrangements let you select invoices or customers. | Availability follows your eligible receivables. |
| Shows up as | A sale of receivables, not a loan. | A borrowing facility you draw against. |
Choose invoice factoring when
- A few large invoices drive your revenue, and you want each one turned into cash.
- Some customers pay on much longer terms than others, and you want to finance only those.
- Your own company is young or growing fast, and your customers are the strongest part of your story.
- You like the idea of the cash arriving per invoice, with a clear start and end for each one.
Choose an A/R line of credit when
- You bill steadily and your needs change from week to week, such as payroll one week and materials the next.
- You want one flexible source of cash that grows as your invoiced sales grow.
- You would rather draw only what you need than decide invoice by invoice.
- You want availability that follows your billings, within an approved limit, instead of a number set during a different part of your business cycle.
Can you use both?
The same invoice generally cannot be sold to one provider and pledged to another, so businesses that use both typically divide their receivables between them, for example factoring invoices from a few large customers while a line covers the rest. Whether that is possible depends on your existing agreements, because a lender that already has a lien on your receivables will usually need to be part of the conversation, and its consent may be required.
Tell any lender about your existing facilities up front. It saves time and avoids surprises later.
How to decide
- List your invoices and customers. Are a few large accounts doing most of the work, or is billing spread across many?
- Look at your costs. Do you face steady weekly needs, or lumpy ones tied to specific jobs?
- Check your customers' payment terms. Which ones create the longest waits?
- Ask each provider how its fees work on an invoice like the ones you actually send.
There is a third option for labor-heavy businesses: payroll funding, which advances against work you have performed but not yet billed. See the full comparison of all three.