Is a Line of Credit or Invoice Factoring Better for My Business?

With so many different financing options out there, it can be difficult to figure out exactly which one is right for your business. The proper financing can give your business the foundation from which it needs to succeed. The wrong financing, however, can hurt significantly. Getting a line of credit or using invoice factoring are two popular methods, but there are important distinctions between the two that could have major implications for your business.

Has Your Business Been Around for a While?

The more established your business is, the more you might want to look at a line of credit. Low-risk clients are often the ones lenders offer lines of credit to. A well-established business is going to inherently less risky than one just starting out. Good credit is something that lenders often look at when determining a line of credit. A business that’s been successful is more likely to have that to offer. By that same token, there are easier qualification requirements to get invoice factoring. Is your company free of UCC liens? Is it at imminent risk of bankruptcy? As long as those two requirements are met and a company with good commercial credit is paying the invoice, then your business qualifies for invoice factoring. So, it’s a great option if you have very good commercial clients. Those are the kinds of clients who will pay in 60 days or less. If your small company is growing quickly, then this could absolutely be the best option for you.

Has Your Company Gotten As Big As It Can?

A line of credit is a good option for a company that’s reached “growth maturity” in part because getting an increase on a line of credit can be a complicated process. The increase has to be justified by a cash flow and assets. It’s also not a fast process. Before you can even request an increase, your line of credit has to have been in place for a while. That’s more often than not a whole year. Beyond that, it can take weeks for a lender to repeat part of their underwriting, should they have to do so. On the other hand, an invoice factoring credit limit can increase very fast. Get together the data your company has about your expected volume and how many customers you anticipate. After you provide that to the appropriate company, they’ll be back to you within a day. That’s how fast it can be. The chances of getting this increase are not terribly high. Make sure that newer customers meet the criteria put in place by the factoring company, and be sure that your account is in good standing.