Small Business Working Capital — Term Loan vs LOC vs Factoring Calculator

How this calculator works

This calculator compares three common working-capital financing structures — a traditional installment term loan, a revolving line of credit (LOC), and invoice factoring — on the same monthly cash-gap profile over the same expected duration of need. The math is mechanical: total cost over the duration under each structure, plus the effective APR under each so the borrower can see the apples-to-apples annualized rate. The output is a recommendation that weights both cost and structural fit by duration.

The three structures solve the same problem (smoothing the gap between cash inflows and outflows in a small business) but with very different mechanics. Term loans are simple — full amount disbursed at closing, fixed monthly payment until paid off, interest on the full balance from day one. LOCs are flexible — draw and repay as needed, interest only on the drawn balance, plus a commitment fee on the undrawn portion. Factoring is fast — sell the receivable to the factor at a discount, get cash on invoice issuance instead of waiting for the customer to pay. The right structure for a given business depends on the duration profile of the need, the borrower's access to bank credit, and the tolerance for cost.

The framework — SBA 7(a), CAPLines, and the conventional alternatives

For SBA-eligible borrowers, the 7(a) program at 15 U.S.C. § 636(a) and 13 CFR Part 120 provides working-capital term loans up to $5,000,000 with a 10-year maximum term under 13 CFR § 120.212(a). SBA 7(a) working-capital loans price at Prime plus a regulated spread under 13 CFR § 120.214 (Prime + 6.5% on loans up to $50K, sliding down to Prime + 3.0% on loans above $350K). For revolving facilities, the SBA's CAPLines program under 13 CFR § 120.390 provides SBA-guaranteed revolving LOCs through four subprograms (Working CAPLine, Seasonal, Builders, Contract) — all priced under the same regulatory framework as 7(a) term loans.

For conventional (non-SBA) financing, banks underwrite working-capital term loans and LOCs against their own credit boxes — typically Prime + 4% to 8% for borrowers with established banking relationships and demonstrable cash flow. Conventional pricing is higher than SBA pricing because there is no SBA guarantee to reduce the lender's loss exposure on default; the trade-off is faster closing (no SBA approval delay) and no SBA personal-guarantee requirement under 13 CFR § 120.160.

Invoice factoring sits outside the bank lending framework entirely. Factors are commercial-finance companies (not banks) that purchase accounts receivable at a discount under UCC Article 9 § 9-109(a)(3). The factoring agreement is a sale of accounts, not a loan, which puts factoring outside most state usury statutes — factors can charge effective APRs that would be illegal as bank lending. Factoring is typically available to borrowers who cannot qualify for bank credit (too new, too thin DSCR, no collateral) or who need cash faster than bank credit can deliver. The price for that accessibility is high.

The factoring-APR trap

The single most important insight in working-capital comparison is the difference between the flat factoring discount and the effective APR. A factor quotes a discount as a percentage of invoice face value — "3% per invoice" or "$300 per $10,000 invoice." That looks modest next to a 12% term loan rate.

The annualization changes the picture entirely. The factor advances the cash for the invoice term (typically 30 to 90 days) and collects the discount at the end of that period. Annualizing: discount × (365 / invoice term days). A 3% discount on a 30-day invoice = 36.5% effective APR. A 3% discount on a 60-day invoice = 18.25% APR. A 2% discount on a 30-day invoice = 24.3% APR.

The cheapest factoring deals — the ones offered to borrowers with the strongest customer-credit profiles and the largest invoice volumes — run 1.5% per invoice on 30-day terms, which still annualizes to 18.25% APR. The most expensive — for newer borrowers with weaker customer credit — run 4% to 5% per invoice on 30-day terms, which annualizes to 48.7% to 60.8% APR. Even at the cheap end of the factoring market, the APR exceeds SBA 7(a) and conventional commercial term-loan rates.

Factoring is sometimes the right answer — when bank credit is unavailable, when the receivables are concentrated and customer credit (not borrower credit) is the binding constraint, or when speed is the dominant consideration. It is almost never the cheapest answer.

Inputs explained

Monthly cash gap — the recurring monthly shortfall between operating cash inflow and outflow. For seasonal businesses, use the AVERAGE monthly gap over the duration of need, not the peak.

Duration of need — how long the cash gap is expected to last. For project-financing (a defined capital event), use the project duration. For permanent working-capital needs (the business has grown and the higher working-capital base will not retract), use 24-plus months. The duration drives the recommendation logic.

Term-loan rate and amortization — the supplied rate and term for the proposed term loan. SBA 7(a) working-capital loans cap at 10-year amortization under 13 CFR § 120.212(a).

LOC rate and average utilization — the rate on drawn balance and the expected average drawn balance as a fraction of maximum line. The utilization assumption is a key sensitivity.

LOC commitment fee — the annual fee on the undrawn portion. Typical range 0.25% to 0.50%.

Factoring discount per invoice — the factor's compensation as a percentage of invoice face value. Typical range 1.5% to 5%.

Average invoice term in days — the payment term on the factored invoices. Net-30 most common in B2B; net-60 and net-90 in government, healthcare, and large-retailer supplier contexts.

Factoring advance rate — the percentage advanced immediately; typical range 80% to 90%. Does not affect total cost (the discount is the cost) but affects cash up-front per invoice.

Industry benchmarks

Across the SBA participating-lender community and the commercial lending market, several rules of thumb hold most of the time.

The structural-versus-transient distinction is the foundational question. A business whose working-capital need is structural (permanent growth in inventory and receivables as the business scales) should finance it with structural debt — typically a long-dated term loan that amortizes against the business's cash flow over 5 to 10 years. A business whose working-capital need is transient (seasonal peak-and-trough, project-specific, or bridge-to-event) should finance it with revolving credit — typically an LOC that the business draws and repays as needed.

The optionality value of an LOC is real and underweighted in cost-only comparisons. A business that takes out a $500K term loan when it expects to need $500K of working capital for 18 months pays interest on the full $500K for the full 18 months, even if the actual need turns out to be only $300K for only 12 months. The same business with a $500K LOC pays interest only on the actual drawn balance for the actual duration of need. The savings are material and the calculator captures them through the utilization input — but borrowers should remember that lower utilization than expected makes the LOC even more economic than the calculator shows.

Factoring volume in the U.S. small-business market runs roughly $130 billion annually (International Factoring Association data). The borrower base skews toward transportation (trucking, particularly), staffing, manufacturing, and government contracting — industries where invoice cycles are long and customer credit is strong. Factoring is increasingly used as a complement to bank credit (the borrower carries a term loan and an LOC and factors a portion of receivables that fall outside the LOC's eligible-receivables formula) rather than as a substitute.

Merchant cash advances (MCA) are NOT modeled in this calculator and should not be considered a normal working-capital option. MCAs are structured as a purchase of future credit-card or daily-deposit receipts, which puts them outside most state usury statutes. Effective APRs frequently exceed 80% to 150% annualized. MCAs are crisis financing, not working-capital financing — they should be considered only when no other structure is available and the cost is understood.

What this calculator does NOT model

1. Combined structures. Most established small businesses use a combination — term loan for structural base, LOC for transient need, occasional factoring. The calculator compares the three structures one at a time.

2. Floor plans. Used in auto and equipment dealer industries; not modeled.

3. Merchant cash advances. Deliberately omitted to avoid suggesting they are a normal choice.

4. Recourse-vs-non-recourse factoring. The supplied discount should be the actual rate quoted; the calculator does not separately price the credit-risk transfer.

5. The SBA personal-guarantee cost. SBA 7(a) and CAPLines both require personal guarantees from every 20%-plus owner under 13 CFR § 120.160. The contingent liability has real value to the lender and real cost to the guarantor; not captured in the rate comparison.

6. The cash-cycle structural improvement. A business with 90-day DSO (days sales outstanding) might solve the cash gap by improving collections rather than financing it — moving to 60-day DSO can eliminate a substantial fraction of the working-capital need. The calculator finances the need as supplied; the cash-cycle-improvement analysis is in the Fennec Press bundle.

7. Tax effects. Interest on business debt is generally tax-deductible under 26 U.S.C. § 163. Factoring discounts are deductible as a cost of doing business. Both reduce the effective after-tax cost; the calculator shows pre-tax cost.

8. Origination and closing costs. SBA loans carry guarantee fees (waived on loans up to $1M under current SOP 50 10 7.1) and lender packaging fees; conventional loans carry origination fees; factoring agreements carry setup fees and ongoing monthly minimums. Not modeled.

Sources

• Small Business Act, 15 U.S.C. §§ 631 et seq.
• 15 U.S.C. § 636(a) (SBA 7(a) general business loan authority)
• 13 CFR Part 120 (SBA business loan regulations)
• 13 CFR § 120.212 (7(a) maximum terms — 10 years for working capital)
• 13 CFR § 120.214 (7(a) interest-rate ceiling)
• 13 CFR § 120.390 (CAPLines program)
• 12 CFR Part 1003 (HMDA — adjacent commercial reporting framework)
• UCC Article 9 § 9-109(a)(3) (factoring as a sale of accounts)
• State usury statutes (vary by jurisdiction; most exempt commercial loans above certain sizes)
• International Factoring Association practitioner literature
• Federal Reserve H.15 Selected Interest Rates (WSJ Prime Rate)
• Robert Morris Associates RMA Annual Statement Studies (industry-norm working-capital ratios by NAICS)

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Last reviewed: 2026-05-17. Statute and regulation citations are current as of the review date. SBA SOP 50 10 7.1 is the current FY 2025 SOP; future reissues may modify the regulatory parameters. Factoring discount ranges are practitioner estimates based on IFA-published industry data; actual quotes vary by industry, customer credit, and borrower factoring volume.