Factoring vs Line of Credit

Why this comes up

Factoring and a line of credit solve the same underlying problem, funding the gap between paying workers and collecting from clients, but they're priced completely differently: a per-invoice fee against an interest rate on a drawn balance. Comparing them on the raw percentages alone doesn't tell you which actually costs less for the same dollars over the same period.

How we calculated this

Factoring Cost = the exact fee computed by Factoring Cost (flat or incremental)
LOC Interest = Funded Amount x Annual Rate x (Days Borrowed / 365)
LOC Total Cost = LOC Interest + Origination Fee + Facility Fees + Unused-Line Fee (if any)
Cheaper Option = whichever total cost is lower

Worked example: $100,000 invoice, 90% advance ($90,000 funded), a 2% factoring fee, 30 days outstanding, a 12% annual line-of-credit rate.

Factoring Cost = 100,000 x 0.02 = $2,000
LOC Interest = 90,000 x 0.12 x (30 / 365) = $887.67
Difference = 2,000 - 887.67 = $1,112.33
Cheaper Option = Line of Credit

What this means

• A line of credit is very often cheaper once an agency qualifies for one, because interest on a drawn balance is generally a lower-cost structure than a flat per-invoice fee.
• Cheaper doesn't automatically mean better; factoring often serves agencies that can't yet qualify for a line sized to their needs, or that specifically want collections handled by the factor.
• This comparison is only as accurate as the LOC terms entered; a real facility often carries origination, facility, and unused-line fees that meaningfully change the total cost beyond the headline interest rate.

Common mistakes

• Comparing a factoring fee percentage directly against an LOC's annual rate without converting both to the same time basis.
• Leaving LOC origination, facility, or unused-line fees at zero when the real facility charges them, making the LOC look artificially cheap.
• Treating the cheaper option as automatically the right one without checking whether you'd actually qualify for it, or whether its covenants fit how the agency is growing.

Frequently asked questions

Why would factoring ever be the right choice if it's more expensive?

Underwriting for factoring focuses on your clients' creditworthiness rather than your own balance sheet, a real advantage for a newer or thinly-capitalized agency that wouldn't qualify for a line of credit sized to its needs.

What's the unused-line fee?

Some credit facilities charge a fee on the unused portion of your approved line, not just the amount actually drawn. Enter your line size to include this if your facility charges it.

Should I run this comparison once or periodically?

Periodically. Agencies sometimes stay on factoring well past the point where a line of credit would be cheaper, simply because switching takes effort; re-running this check catches that gap.

Limitations

Compares stated terms only; actual approval, covenants, and personal guarantee requirements vary by lender and aren't modeled here.

Next decision

• See if switching funding sources would actually save money over a full year

Learn more

Factoring vs Line of Credit for Staffing Agencies — what each option actually costs, and when the pricier one is still the right call.