Line of Credit vs Term Loan vs Factoring

How to use it

Enter the cash you need and for how long, then the terms on offer for a line of credit, a term loan and invoice factoring. The calculator costs each route over the same horizon in interest and fees, names the cheapest, and puts each on a simple annual rate so they can be compared.

Where the number comes from

• Line of credit: the full amount is drawn for the whole horizon and repaid at the end. Cost is interest on the amount drawn, the arrangement fee on the whole limit for each year started, and the non-use fee on the undrawn part of the limit.
• Term loan: the amount is borrowed and repaid in equal monthly instalments over the term. Kept to term, the cost is the arrangement fee plus every month’s interest. Repaid early, it is the fee, interest up to the end of your need, and the early-repayment fee on the balance then owed.
• Factoring: invoices worth the cash needed ÷ the advance rate are factored every 30 days, so the advance stays out for the whole horizon. Each batch costs the discount fee for 30 days plus the service fee, both on the invoice value.
• Effective annual rate: each route’s cost ÷ its average balance ÷ the years it is outstanding. It is a simple rate, not compounded, so it is a like-for-like yardstick rather than an APR.

What goes wrong

The part most calculators leave out.

• Factoring is modelled as a fresh batch of invoices every 30 days that each stay out a full 30 days. Customers who pay faster cut the discount fee; slower payers raise it, and you need enough invoicing to raise the cash at all.
• The line assumes you draw the full amount on day one and keep it drawn. Drawing less, or paying down early, lowers the interest but raises the non-use fee.
• An amortising loan pays itself down from the first month, so you do not keep the full amount for the horizon. If you need all of it for the whole time, the loan funds less than the other two routes.
• Many factoring contracts add minimum-volume charges, set-up fees or credit-check fees, and many lines carry renewal and legal fees that are not a share of the limit. None of those are here unless you fold them into the inputs.
• Recourse factoring leaves you liable for invoices customers do not pay. That risk is not a cost in this comparison.
• This compares cost only. Whether a lender will offer a given route, the security they take and covenants they set can matter more than the price.

Questions

Is factoring more expensive than a loan?

Per year, usually yes: a discount fee of 1.5% per 30 days is roughly 18% a year before the service fee. But factoring charges only while the cash is out, with no arrangement fee or term to sit out, so for a need of a few weeks it can cost less in total than a loan you would keep, or pay to leave, for years.

Why does a line of credit cost money when I am not using it?

Because the lender has committed the whole limit to you and must hold capital against it. That is paid for through the arrangement fee on the full limit and a non-use or commitment fee on whatever stays undrawn.

Why does repaying a term loan early change the result so much?

Kept to term, the loan charges interest for every month of the term, including months after you stop needing the cash. Repaying early stops that interest, at the price of any early-repayment fee on the balance.

What does the effective annual rate here mean?

Total cost divided by the average amount outstanding and by the years outstanding. It is a simple rate for comparing the three routes, not a compounded APR, and it is not the figure a lender is required to disclose.

Does anything I type get sent anywhere?

No. The whole calculation runs in your browser. Nothing is sent to us or logged, and there is no account to create. Your browser keeps the figures with this tab’s history so that Back and Reload bring them back, and Reset clears them.