It makes sense to stop factoring and move to a bank line of credit when three things are true at once: a bank will approve you on your own financial statements, the yearly savings clearly beat the cost of leaving, and you have the cash to cover what the line won't advance on day one. Our view is that the switch should be planned backward from your factoring contract's notice date over 6 to 12 months, because the contract, the lien and your customers' payment instructions all take time to unwind.
When it makes sense to stop factoring and move to a bank line
Factoring buys speed and outsourced collections, and the factor's review centers on your customers' credit. A bank line usually costs less, but the bank is lending to you and wants evidence that profits can repay it. That usually makes bank approval the slowest of the three conditions to prepare for.
We found no regulator checklist for leaving factoring, so this table pairs common practice with published reference points. Every bank sets its own bar.
| Signal | What ready usually looks like | Published reference point |
|---|---|---|
| Profit | A full profitable year, with interim statements showing it has continued | FDIC examiner manual, section 3.2 (pages dated 3-2026): "the borrower must demonstrate financial progress" |
| Financial history | Two or more years of filed tax returns and year-end statements | SBA CAPLines: for existing businesses, analysis uses "the three most recent years of historical financial information" plus an interim statement |
| Debt service coverage | Cash flow covers every loan payment with room to spare | SBA CAPLines: "equal to or greater than 1.15," and 1:1 on a global basis |
| Customer concentration | No single customer dominates receivables | OCC: normally concentrated when single accounts are "10 percent or more" of receivables |
| Taxes and liens | Taxes filed and current, no tax liens | OCC: tax liens "can take priority over the bank's lien" |
The SBA figures come from SOP 50 10 8.1, effective October 1, 2026, and apply to SBA-guaranteed CAPLines. The OCC points come from its Asset-Based Lending booklet, linked below, which is written about bank asset-based facilities. Every source in this guide was checked on October 6, 2026.
How a bank will read your factoring history
In our view, having factored isn't a mark against you by itself. The FDIC manual lists among typical receivables borrowers businesses "growing rapidly" that need year-round financing "in amounts too large to justify unsecured credit." A banker will want to know whether that still describes you and what has changed since you started.
Three things tend to come up in the review:
- The factor's UCC-1. The OCC's Asset-Based Lending booklet (version 1.1) says a bank should run a lien search before funding an asset-based facility and that the best solution is to be "the only lender to hold a lien against a firm's accounts receivable or inventory." Under UCC 9-322(a)(1), conflicting perfected security interests "rank according to priority in time of filing or perfection," so in our reading the factor's earlier filing generally sits ahead of the bank until it's terminated or subordinated.
- Margins after factoring fees. Reported profit already carries the factor's fees, so give the bank a 12-month schedule of them. Whether it gives credit for that is its own call.
- How your customers pay. Ask the factor for agings and payment reports, which give the bank evidence on turnover, disputes and credits.
Where asset-based lending fits between factoring and a bank line
Asset-based lending can suit a company that has outgrown factoring's pricing but can't yet pass a conventional bank's credit test. The OCC booklet says ABL serves "borrowers that may have high leverage, erratic earnings, or marginal cash flows," and that an ABL lender "places less reliance on financial covenants and more reliance on collateral controls and monitoring."
The same booklet says an ABL facility "is often more expensive than other types of commercial lending" and that field audit costs are "generally passed on to the borrower." An older OCC booklet on receivables financing (March 2000) describes the next rung up, a borrowing-base line with less rigorous controls: "Borrowers are usually stronger financially than in ABL, enabling the bank to ease administrative controls."
An SBA-guaranteed line is another middle step. Under SOP 50 10 8.1, a Working Capital CAPLine can go up to $5,000,000 with a maximum maturity of 10 years. Its advance rate "cannot exceed 80% of the eligible receivables" in most cases or "50% of eligible inventory," and a borrowing base certificate is required at $2,000,000 or more.
What the switch saves and what it costs
Every figure in this example is an assumption for illustration. A company bills $250,000 a month on credit and customers pay in about 45 days, so about $375,000 of invoices are open at any time. The factor advances 85% and charges 3% of each invoice's face value. The bank offers a $350,000 line that advances 80% of eligible receivables, treats 10% of invoices as ineligible and charges 9.00%, which is the 7.00% bank prime rate in the Federal Reserve's H.15 release for October 5, 2026 plus an assumed 2 points. The line has a $1,750 annual fee, and we assume it stays fully drawn all year even though it provides less cash than the factor. Bringing collections and credit checks back in-house costs $18,000 a year.
| Assumed figures | Factoring | Bank line |
|---|---|---|
| Cash provided on $375,000 of open invoices | $318,750 | $270,000 |
| Fees or interest per year | $90,000 | $24,300 |
| Annual line fee | None | $1,750 |
| Collections and credit work | Included in the fee | $18,000 |
| Total yearly cost | $90,000 | $44,050 |
The line saves $45,950 a year, or about $3,830 a month. Two one-time items sit against that. Exit costs are an assumed $10,000 early termination fee (2% of a $500,000 facility limit) plus $5,000 of bank closing and legal costs, which the savings repay in about four months. The cash gap is larger. On closing day the bank's first advance has to retire the $318,750 the factor has advanced, but the line makes only $270,000 available, so $48,750 comes from your own cash. Together that's $63,750 you need on hand.
Two changes move the answer. Leaving at term end with proper notice may remove the termination fee, depending on your contract. And at a 1.5% factoring fee the yearly cost would be $45,000, about the same as the line, which leaves little reason to move.
▦Estimate your lines of credit paymentsRun the numbers in the lines of credit estimator →▸A 6 to 12 month plan to switch without a cash gap
We'd budget about six months for the transition from invoice factoring to a bank line of credit if the company is profitable with clean books, and closer to a year if you need another profitable year-end on file first.
| When | What to do |
|---|---|
| Months 1 to 2 | Read the factoring agreement for the renewal date, notice window and termination fee. Run a UCC search on your legal name. Close the books monthly and clear any tax balances. |
| Months 2 to 4 | Run the savings and cash gap math with your own numbers and start building the cushion. Ask the factor for agings and payment history. |
| Months 4 to 7 | Approach two or three banks, starting with the one that holds your operating account. Send the items on our documents checklist plus agings and a debt schedule, and ask whether the line has a borrowing base. |
| Before the notice deadline | Get a written commitment before sending a notice you can't take back. If the deadline comes first, ask the factor in writing for a short extension. |
| Final 30 to 45 days | Request an itemized payoff letter and settle the lien termination and customer release letters in writing. |
| Closing day | The bank's first advance pays the factor, and customers get new payment instructions. |
| First 60 days after | Chase payments still going to the factor, confirm the termination shows on a UCC search and send your first bank reports on time. |
Two legal steps protect the handoff. Under UCC 9-406(a), a customer that received notice to pay the factor "may not discharge the obligation by paying the assignor," so we'd expect each notified customer to want the factor's written release before it pays you or the bank's lockbox. Under UCC 9-513(c), a secured party has 20 days after it receives your authenticated demand to send or file a termination statement. For a loan, that duty arises once no obligation is secured and no commitment to advance remains. For sold accounts, it arises once the customers on those accounts have discharged their obligations, which in our reading may not match your closing day, so write the factor's agreement to terminate its filing into the payoff letter. These are uniform-text citations and state versions vary, so have an attorney review the documents. In Canada, ask counsel about your province's rules.
When staying with factoring is the better call
We'd stay put, or stop at ABL, in four situations:
- You're still losing money or have less than two years of statements.
- Sales are growing faster than a fixed limit can follow. With receivables financing, the FDIC manual notes, "borrowing capacity expands as sales increase."
- One or two customers make up most of your receivables.
- The savings are thin once in-house collections and exit costs are counted.
A bank's term sheet still helps in those cases, because it gives you a price to negotiate against at renewal.
EQ Funding isn't a lender. One application goes to lenders in our network who compete to offer terms, so you can set a business line of credit quote beside your current invoice factoring cost. Approval and terms vary by lender. For the product-level comparison, see factoring vs. a line of credit.