What you’ll learn:
- How invoice factoring works
- How a revolving line of credit works
- How to figure out which cash flow solution is right for your business
Cash flow is like the heartbeat of a business—pumping vital resources in and out to keep everything functioning as expected. When that heartbeat stutters, how do you protect against damage? Strategic use of financing tools offers you more financial freedom to optimize daily operations, invest in future projects, and keep your business running smoothly.
Learn about invoice factoring versus lines of credit to see which suits your circumstances best.
What is the difference between invoice factoring and a line of credit?
Both invoice factoring and a line of credit are cash flow management tools. When you don’t have access to liquid assets or you want to make strategic growth investments, these options offer a way to fund operations.
- A revolving line of credit gives you access to a pool of funds you can borrow from as needed, up to a set limit.
- Invoice factoring allows you to sell your unpaid invoices to a third party in exchange for immediate cash.
These financing tools offer a similar result—access to cash flow—but they work in very different ways. Which option is best suited for your company? It depends on your business history, goals, and expenses. Let’s look at line of credit vs factoring examples.
How a revolving line of credit works
A revolving line of credit is typically issued to a business from a financial institution, like a bank or credit union. It’s not a one-time loan—it’s an open door that allows you to keep borrowing money under the agreed-upon terms.
When the institution approves you for a line of credit, they give you a credit limit and a set draw period. For example, they might allow you to borrow money up to $25,000 at any time during a two-year period. You borrow what you need for expenses, pay it back, and then borrow money again as needed. As you use the line of credit, it builds your credit history as well.
You may use a line of credit to manage cash flow, cover payroll, or purchase inventory. It’s ideal for fixed operational costs and growth opportunities, allowing you to invest in your business with predictable access to funds.
Advantages:
- Flexible access to funds
- Can reuse and re-borrow
- Accrues interest only on what you borrow
Considerations:
- Requires strong creditworthiness
- Borrowing is limited to draw period
- Potentially lower borrowing limits for newer businesses
How invoice factoring works
To participate in invoice factoring, a company gives their invoices to a third party entity known as a factoring company. The exchange of money isn’t based on credit or loans. It’s a sales process, where invoice ownership is fully transferred to the factoring company.
The factor pays a percentage of the invoice (minus fees) to your company. They then take over the collections process, and your clients pay their owed money directly to the factoring company.
It may affect client relationships, but it is one of the most accessible short-term financing methods available to SMBs because of how you get approved for factoring. The factor looks at your client’s creditworthiness (not yours) to determine whether they want to purchase the invoices.
Invoice factoring offers a solution for businesses that have long payment cycles. B2B companies waiting on large client payments are ideal candidates. Rather than waiting for invoices to come due 30, 60, or 90 days from now, you get immediate access to cash.
Advantages:
- Accessible approval process
- Fast access to cash
- Based on customer creditworthiness, not yours
Considerations:
- Fees can add up
- May impact customer relationships
- Funds are dependant on individual invoice
Which financing option is right for your business?
As you consider which financing tools will best support your business, you’ll want to look at the advantages and considerations of each method. Most importantly, you’ll want to look at your own circumstances. Which method fits with your history and goals?
Ask yourself the following.
Which is more important for your operations: flexibility over time or immediate access to funds?
If you want maximum flexibility, a business line of credit suits your needs best. If you need immediate access to cash, invoice factoring offers the faster cash flow process.
Do you want to maintain direct management of client relationships?
If you don’t want to involve a third party in client relationships, then invoice factoring is not the best option for your business. A business line of credit doesn’t involve anyone else in your relationship management.
Is your business well-established or are you still building credit?
If you have a well-established credit history, you have more options available to you for a business line of credit. If you are still building credit, you’ll likely face higher interest rates and lower limits for a line of credit, which may not suit your overall financial goals.
Does your business model rely on invoicing—with service-based B2B relationships or e-commerce sales?
If you have a large volume of invoices, invoice factoring can make managing the cash flow of those payments easier. If invoicing isn’t a regular part of your business model, the fees that come with factoring may not be worth it.
Find financial flexibility with Hopscotch Flow
Keep in mind that while these two financing methods are popular, they aren’t the only options available to you. Loans, credit cards, and alternative financing methods offer additional choice, depending on your company’s situation and needs.
Rather than selling invoices or relying on a line of credit from a traditional lender, transform your accounts receivable pool into a powerful tool for unlocking cash flow. Hopscotch Flow is an easy-to-access, low-risk option for SMBs—allowing you to access a revolving line of credit based on what you’re already bringing in. No hard credit checks, no selling individual invoices.
Start invoicing with Hopscotch, get approved for Flow, and take control of your finances.
Bret Lawrence
Writer
Bret Lawrence writes about invoicing and cash flow management at Hopscotch. Her previous roles include senior financial writer at Better Mortgage, where she covered lending and the home buying process. Her writing is not financial advice.
