Why this decision matters

Selecting between an invoice advance and a short-term line of credit changes how you manage working capital, customer relationships, and financing costs. In my 15 years advising small businesses I’ve seen the right choice prevent payroll shortfalls and the wrong one create expensive, recurring debt.

How each product works (quick overview)

  • Invoice advance (factoring/invoice financing): You sell or borrow against unpaid invoices. The funder advances a percentage (the advance rate), holds a reserve, charges fees, and collects the invoice from your customer when it’s due. Models vary: recourse factoring makes you responsible if the customer doesn’t pay; non‑recourse shifts that credit risk to the funder.
  • Short-term line of credit: A lender approves a maximum credit amount you can draw against as needed. Interest (and sometimes fees) apply only to the outstanding balance; you repay and re-borrow during the term.

Typical costs & timing (what to expect)

  • Invoice advances: Fees often run from roughly 1%–5% of the invoice per draw, though effective annualized costs depend on how long the invoice remains unpaid. Additional fees (setup, monthly, or reserve fees) and the advance rate (commonly 70%–90%) affect total cost. Providers’ pricing and recourse terms vary widely—read contracts closely. (See our deeper guide on invoice financing for small businesses.)

  • Short-term lines of credit: Interest rates are typically tied to a benchmark (prime or SOFR) plus a spread; qualified borrowers often see mid-single-digit to low-double-digit APRs, but rates vary with creditworthiness and market conditions. Lines may also include maintenance or unused-commitment fees.

When one works better than the other (use cases)

  • Choose an invoice advance when:

  • You have significant A/R from reputable customers and need cash immediately to cover payroll, inventory, or a rapid growth spike.

  • You prefer a solution tied directly to invoices rather than borrowing against your business credit.

  • Choose a short-term line of credit when:

  • Your business needs flexible access to capital for unpredictable expenses (repairs, seasonal inventory, marketing) and you have a decent credit record.

  • You want to avoid third-party collection on your customers and keep customer relationships private.

Eligibility & underwriting differences

  • Invoice funders prioritize the creditworthiness of your customers and the quality of invoices; businesses with steady receivables from established buyers are more attractive.
  • Lines of credit are underwritten based on business revenue, cash flow, and owner credit scores; personal guarantees are common for smaller firms.

Key pros & cons (decision checklist)

  • Invoice advance: + Fast cash tied to invoices; offloads some collections; good for cash‑heavy receivable cycles. – Can be pricier over time, may require customer notice or collections by the funder, and some agreements include recourse.

  • Short-term line: + Flexible borrowing and often cheaper if paid quickly; maintains customer relationships. – May require stronger credit or collateral and can turn into a debt cycle if misused.

Practical steps to decide (simple checklist)

  1. Calculate the effective cost: ask lenders for an example APR or dollar cost based on your typical invoice age or draw schedule.
  2. Consider customer impact: will your customers be notified or contacted by a funder?
  3. Check covenants and recourse: can you be forced to repurchase unpaid invoices?
  4. Compare speed vs ongoing flexibility: need one-time rapid cash (invoice advance) or recurring access (line)?
  5. Run the numbers for a 30–90 day scenario: show total fees and interest in dollars, not just percentages.

Common mistakes I see

  • Treating an invoice advance as a long-term funding source instead of a short-term liquidity tool.
  • Failing to read recourse and reserve clauses that shift credit risk back to the seller.
  • Using a line of credit for recurring operating shortfalls instead of fixing the underlying cash-flow problem.

Short FAQs

  • Can I use both? Yes. Some businesses use invoice advances during extended slow-pay periods and keep a small line for unpredictable expenses.
  • Will invoice financing hurt customer relationships? Some funders collect directly and may contact customers; invoice discounting keeps collections private in many arrangements.
  • Which is cheaper? It depends on timing and borrower profile—short-term lines are often cheaper when paid quickly; invoice advances can be more expensive but faster and based on customer credit.

Resources & authoritative guidance

Related reads on FinHelp

Professional disclaimer

This content is educational and not personalized financial advice. Talk with a CPA or small-business lender to evaluate how either option affects taxes, covenants, and your cash-flow plan.