Factoring vs Asset-Based Lending vs a Credit Line for Distributors

For a fast-growing distributor, invoice factoring, asset-based lending and a bank line of credit can all turn receivables into working capital, but each one sizes, prices and monitors that money differently. Factoring sells your invoices to a factor, an asset-based line lends against a borrowing base of receivables and inventory, and a conventional bank line usually leans more on your financial statements and covenants. Our view: factoring is a good bridge while you're small or thinly capitalized, and the move to ABL or a bank line should start once the math shows you've outgrown it.

How factoring, ABL and a bank line decide how much you can draw

Factoring is a purchase of receivables. The OCC's Accounts Receivable and Inventory Financing booklet (March 2000, expanded by the 2014 ABL booklet) says a factor buys invoices at a discount, sets sub-limits for each customer based on payment status, exposure and credit strength, and does most of its due diligence on the customers rather than the seller. BDC adds that factoring isn't a loan and that in most cases the factoring company collects the receivables. That helps a young distributor whose buyers are stronger credits than it is.

Asset-based lending is a revolving loan capped by a borrowing base. The OCC's Asset-Based Lending booklet (version 1.1, read October 2026) says you can draw up to the lesser of the borrowing base or the commitment. It names distributors among the borrowers that frequently use revolving credit and says ABL lets rapidly growing companies fund growth by financing increases in receivables and inventory.

A bank line of credit may or may not carry a borrowing base. The OCC's 2000 booklet describes a middle category, secured financing, with a borrowing-base formula but lighter controls, for borrowers usually stronger financially than ABL borrowers. In Canada, BDC explains that the usable part of an operating line varies monthly with inventory and receivables; its example company had a $1.7 million authorized line but could use $1,298,750 that month.

What each option costs and how lenders watch the collateral

BDC lists the factoring rate as a percentage of invoice value, plus possible setup fees, monthly minimums and service charges, and says rates and advances vary with your credit, your customers' credit, your volume and industry risk. Because the fee applies to the full invoice while you receive only the advance, the cost on the cash you use runs higher than the headline rate. Our guide to invoice factoring rates and fees breaks those charges down.

ABL pricing mixes interest spreads with fees. The OCC says ABL facilities are often priced on "a complex structure of fees and loan spreads that change based on performance," and that the fee structure typically covers field audits, lockbox arrangements and appraisals. It's candid that ABL is often more expensive than other commercial lending, though it may still be the most economical financing available to the borrower.

Under the OCC booklet, the monitoring you pay for looks like this:

• Borrowing base certificates are often due weekly or monthly, and sometimes daily.
• A field audit should come before the loan is booked and regularly after, often quarterly, and the cost is generally passed on to the borrower.
• In most ABL deals the lender controls, or keeps the right to control, cash receipts through a lockbox.
• A single customer at 10% or more of receivables is normally treated as a concentration, and concentrated accounts should be limited to 10% to 20% of the receivables borrowing base or advanced at a lower rate.
• An account is normally ineligible once it's past due by three times the terms, such as 90 days on 30-day terms, and cross-aging can knock out all of that customer's invoices.
• Banks typically advance up to 65% of the book value of eligible inventory, or 80% of its net orderly liquidation value.

A conventional bank line usually involves less of that monitoring. The OCC says ABL lenders rely less on financial covenants than traditional commercial lenders, a significant benefit to a borrower that may be growing rapidly.

A growing distributor at three stages: availability and cost

Every number here is an assumption chosen to show the mechanics. Customers pay in about 45 days, so receivables equal 1.5 months of sales, and 10% of receivables and 15% of inventory are ineligible. The factor advances 80% of eligible invoices and charges 2% of each invoice's face value. The ABL lender advances 85% of eligible receivables and 50% of eligible inventory at cost, charges 10% interest (the 7.00% bank prime rate in the Federal Reserve's H.15 release for October 5, 2026 plus an assumed 3 points) and bills an assumed $30,000 a year in fixed fees for field audits and monitoring. The bank line charges an assumed 9% on a fixed $250,000 limit.

Percentages are each year's cost divided by the average balance outstanding.

At Stage 1 the bank line is cheapest if the bank approves it, and factoring beats ABL because $30,000 of fixed fees weighs heavily on a $216,000 balance. By Stage 2 the bank line funds less than half of what the receivables support, ABL costs 15.6% against factoring's 20.0%, and the borrowing base is about half again as large because inventory counts. At Stage 3 ABL saves $105,000 a year.

To find your own crossover, divide the ABL lender's annual fixed fees by the gap between factoring's cost on cash advanced and the ABL interest rate. Here that's $30,000 divided by 10 points, or $300,000, which this distributor reaches near $3.3 million in sales. The math leaves out the credit checks and collections the OCC says factors provide, and your staff time on ABL reporting, so price both in.

Which fits a fast-growing distributor: factoring, asset-based lending or a line of credit?

We'd start talking to ABL lenders once your average balance has passed your crossover, you can deliver accurate agings and inventory reports every month, and a fixed bank limit keeps running out. Plan the exit early. The OCC says that, ideally, one lender holds the lien on receivables and inventory, and ABL agreements often bar borrowing elsewhere without consent, so expect the factor to be paid off at closing. Check the notice period and any early-exit fee in your factoring agreement before you sign it.

The later step to a lighter bank line tends to follow profits and a track record, since the OCC links lighter controls to financially stronger borrowers. Long-lived assets such as racking or delivery trucks belong on a term loan or equipment financing instead of the revolver.

SBA and Canadian versions of a monitored line

SBA's 7(a) loan types page (read October 2026) describes the Working CAPLine as "an asset-based revolving line of credit for businesses unable to meet credit standards associated with long-term credit," generally used by businesses that provide credit to other businesses. Lenders may charge additional fees for the collateral monitoring, and CAPLines other than Builders have a maximum maturity of 10 years. The same page lists the 7(a) Working Capital Pilot, a monitored line of up to $5,000,000 with maturities up to 60 months, limited to businesses with 12 full months of operations that can produce timely financial statements, receivable and payable agings and inventory reports. Confirm current terms with an SBA lender.

In Canada, BDC's operating line example margins eligible receivables at 75%, raw materials at 40% and finished products at 60%, then subtracts priority payables such as sales taxes, source deductions and wages. BDC stresses that the formula comes from your banking agreement and varies by institution.

EQ Funding doesn't lend or factor. One application through EQ goes to lenders who compete, so you can compare factoring and business line of credit offers at the same balance. For the two-way version, see factoring vs a line of credit.