A ledgered line of credit (LLOC) and an invoice factoring line can both provide flexible working capital. While both products share some similarities, they also have important operational differences.
This article explains the main differences between the two products so you can decide which option is better suited to your company. We cover the following:
- How do they work?
- Minimum facility size
- Advance rates
- Accessing funds
- Setup speed
- Cost and fees
- Invoice verification
- Qualification criteria
- Reporting requirements
- Covenants
- Which option is right for your company?
1. How do they work?
Both a ledgered line of credit and an invoice factoring line provide a revolving line of financing secured by your accounts receivable. The primary difference is how each facility is structured.
a. Ledgered line of credit
With a ledgered line of credit, your borrowing availability is based on the value of your eligible accounts receivable ledger. As new invoices are generated and customers pay existing invoices, your available borrowing amount changes accordingly.
Read “What is a ledgered line of credit? How does it work?” to learn more.
b. Invoice factoring
With invoice factoring, you sell eligible invoices to the factoring company. The factor advances a percentage of each invoice and pays the remaining balance, less fees, once your customer pays the invoice.
Read “How does invoice factoring work?” to learn more.
2. Minimum facility size
Ledgered lines of credit are intended for larger small businesses and middle-market companies. Factoring lines can be used by companies of virtually any size.
a. Ledgered line of credit
Most ledgered line of credit providers work with companies that invoice a minimum of $1M per month. They can also work with companies that have fluctuating seasonal revenues, provided that their annual revenue is at least $12M.
b. Invoice factoring
Invoice factoring can be used by small companies and large businesses alike. Some factoring companies can finance businesses that generate as little as $10,000 a month in sales.
3. Advance rates
The advance rate is the percentage of the invoice amount that the finance company advances upfront. In general, LLOC advance rates are similar to factoring advance rates.
a. Ledgered lines of credit
The average advance rate for most providers is 80% to 85%. The advance rate can be adjusted based on the credit quality of the accounts receivable and the company’s industry. Some industries, such as transportation and staffing, can receive advances closer to 90%.
b. Invoice factoring
The average advance rate for most factoring companies is 85%. However, the advance rate can be adjusted based on the credit quality of the accounts receivable and the company’s industry. For example, trucking companies and staffing agencies can get advances as high as 92%.
Read “What is the factoring advance?” to learn more.
4. Accessing funds
Accessing funds is relatively simple for both products. However, factoring lines typically require that you submit more backup information than ledgered lines.
a. Ledgered line of credit
Companies can make a draw request from their ledgered line by submitting a sales ledger with the invoices they want to finance. Additionally, the company may need to submit supporting documentation. This depends on the company’s specific circumstances and varies by provider.
b. Invoice factoring
Companies make a draw request from their factoring line by submitting a schedule of accounts, which lists the invoices they want to finance. Additionally, they must submit copies of the invoices as well as any additional information, such as work confirmations.
5. Setup speed
LLOCs and invoice factoring have different setup times because they use different underwriting and approval processes. Note that transaction size and complexity can affect how quickly either type of facility can be established.
a. Ledgered line of credit
Ledgered lines of credit require more underwriting than comparable factoring lines. This typically includes reviewing financial statements, A/R reports, internal controls, credit history, and other company information. On average, lines can be deployed in a week or two, depending on how quickly the information is provided.
b. Invoice factoring
Invoice factoring lines have the fastest setup time due to their simpler underwriting. The line can be underwritten and deployed in a couple of days, provided that the factoring company has access to the information it needs. On average, though, factoring lines take about a week to be set up and deployed.
6. Cost and fees
A ledgered line of credit will typically cost less than an invoice factoring line of comparable size. However, making a comparison is difficult because the two products typically serve companies with different underwriting profiles and financial metrics.
Note: Rates are provided for illustration purposes only and may change based on market conditions.
a. Ledgered line of credit
LLOCs are priced using a reference rate, typically the Canadian prime rate, and a spread. This is commonly referred to as “Prime + X%”, where the spread is adjusted based on the company’s profile. Pricing typically ranges from Prime + 1% to Prime + 6%, based on the size and risk profile of the company.
Note: Some finance companies use CORRA as a reference rate instead.
b. Invoice factoring
Invoice factoring lines can be priced in different ways, and pricing structures vary by factoring company. On average, rates range from 1.15% to 4.5% per 30 days.
Factoring companies can use fixed rates, tiered structures, or a combination of both. Examples include:
Read “Typical invoice factoring rates” for more information.
7. Invoice verification
Ledgered lines of credit and invoice factoring lines verify collateral. However, their approach to invoice verification varies significantly.
a. Ledgered lines of credit
Finance providers typically verify random invoice samples to ensure accuracy. Most invoice verifications are done through the vendor’s accounts payable portal. If an accounts payable portal is not available, the finance company may verify collateral via email or by phone.
b. Invoice factoring
Factoring companies tend to verify most invoices before funding them. Their preferred method is through the vendor’s accounts payable portal. In cases where a portal is not available, the factoring company may verify invoices via email or by phone.
Read “Why do factoring companies verify invoices?” to learn more.
8. Qualification criteria
Qualifying for a ledgered line of credit is more difficult than qualifying for a factoring line. Ledgered lines of credit require stronger financial performance, internal controls, and accounts receivable management.
a. Ledgered line of credit
Ledgered lines of credit are available to larger small businesses and middle-market companies that have established financial and operational controls. The main requirements include:
Note: Ledgered lines of credit can be used by companies that are undergoing a turnaround or have been assigned to Special Assets by their lenders.
Read “Ledgered line of credit qualification requirements” to learn more.
b. Invoice factoring
Invoice factoring lines are available to companies of all sizes. The qualification requirements are relatively simple and include:
Read “Invoice factoring qualification criteria” to learn more.
Note: Companies with legal/tax problems can qualify as long as they have a viable plan to resolve the issue.
9. Reporting requirements
Ledgered lines of credit generally have more reporting requirements than invoice factoring. The exact requirements vary by provider, transaction size, and the company’s underwriting profile.
a. Ledgered line of credit
Ledgered line of credit providers typically require the company to provide financial information regularly. These requirements include:
b. Invoice factoring
Factoring companies have minimal reporting requirements. In most cases, the company must submit an A/R aging report a few times a year. For larger lines, the factor may also require financial statements once a year. These requirements vary by provider and depend on the company’s underwriting profile.
10. Covenants
Ledgered lines of credit usually require the borrower to maintain stronger financial and operating standards. Factoring agreements, on the other hand, focus more heavily on the quality and eligibility of the receivables.
a. Ledgered lines of credit
Ledgered lines of credit usually include covenants related to financial reporting, maintaining eligible accounts receivable, and complying with agreed-upon operating or financial requirements. The exact covenants vary by provider and the company’s risk profile.
b. Invoice factoring
Invoice factoring lines typically have fewer financial covenants. Requirements generally focus on maintaining eligible invoices, keeping receivables free of competing liens, and complying with the terms of the factoring agreement.
11. Which option is right for your company?
In our experience, most companies are better off with a ledgered line of credit if they meet the qualification requirements. The lines cost less and are easier to operate than comparably sized factoring lines. This makes them an attractive option for companies with strong financial reporting, internal controls, and A/R management.
Factoring is a better alternative for companies that don’t meet LLOC requirements or need additional flexibility. While factoring is more expensive, it has simpler qualification requirements, simpler compliance, and can accommodate a broader range of companies and financial situations.
Looking for a financing?
We are a leading provider of ledgered lines of credit, asset-based financing, and invoice factoring. For more information, fill out this form or call us toll-free at (877) 300 3258 to speak with a representative.
Marco Terry is the Managing Director of Commercial Capital LLC and has over two decades of experience in asset-based finance. He has worked with small and mid-sized companies across the United States, Canada, and Australia. Marco holds a Master of Science in Finance.