Why did my bank decline my line of credit?
Banks decline business lines of credit for a short list of reasons, and most of them have nothing to do with whether your customers pay you. A bank is lending its depositors’ money against your company’s future, so its credit box is built around history, profitability and hard collateral. Miss one of those and the answer is often no, even when the business is healthy.
The decline letter may only give you a sentence. Under the Equal Credit Opportunity Act and Regulation B, a business applicant is generally entitled to the specific reasons for an adverse decision, or to request them. Ask. Knowing the real reason tells you whether to fix and reapply in six months or move to a different kind of capital now.
| Bank decline reason | What the bank is worried about | How a factor looks at it |
|---|---|---|
| Thin history (under 2–3 years) | No track record of surviving a downturn | Secondary. The question is whether your customers are established payers |
| Net loss or weak debt service coverage | Profits can’t cover loan payments | Not decisive. Repayment comes from your customers paying invoices |
| Customer concentration | One customer leaving sinks the company | Managed with per-customer limits, often 20%–50% of the ledger |
| Not enough collateral | Nothing to liquidate if the loan goes bad | The invoices are the collateral. There is no separate real estate requirement |
| Industry on the bank’s avoid list | Staffing, construction, trucking and similar are seen as volatile | Many factors specialize in exactly these industries |
| Owner credit or past tax issues | Character and repayment risk | Considered, but rarely the deciding factor if invoices are clean |
Why would a factor approve what a bank turned down?
A factor approves deals banks decline because it is buying a different asset. When you factor, you sell an invoice your customer already owes, and the funder gets repaid when that customer pays. If you invoice a Fortune 1000 manufacturer, a general contractor with a strong payment history or a federal agency, the funder is mostly underwriting that payer, not your balance sheet.
That is why a two-year-old staffing firm with a loss on its tax return can still get a facility, while the same firm would never clear a bank’s credit committee. Factoring fees are higher than bank interest, commonly around 1% to 5% of invoice value per 30 days depending on volume, customer credit and payment terms, because the funder is taking on work and risk the bank wouldn’t. For a full comparison of how the two products behave, see factoring vs. a line of credit.
Factoring is the sale of receivables, not a loan. It doesn’t add debt to your balance sheet the way a term loan does, which can matter when you go back to a bank later.
Is factoring right for me, or should I fix the bank file and reapply?
Factoring fits when the decline was about your company’s profile and your invoices are going to strong B2B or government customers. It fits poorly when your customers are consumers, when invoices are frequently disputed, or when you need less than about $50K of funding capacity. We don’t place freight or owner-operator trucking factoring, consumer receivables, or medical claims billed to insurers except case by case.
Reapplying to a bank makes sense if the decline was narrow and fixable: one bad year that’s already behind you, a missing personal financial statement, or a loan request sized too large. Many owners do both. They factor for 12 to 24 months to fund growth and clean up the numbers, then graduate to a bank line. A well-structured factoring agreement should let you leave without punishing fees when that day comes.
- Good fit: B2B or government customers, net 30 to net 90 terms, invoices of $5K and up, growth you can’t fund from cash.
- Possible fit: a few large customers, existing liens, past-due taxes on a payment plan, an SBA loan already in place (see factoring with an SBA loan).
- Poor fit: consumer billing, progress billing with heavy retainage and no clear sign-off, frequent credits and chargebacks, or need below $50K.
What should I gather before I call a factoring company?
The fastest approvals come from owners who show up with a complete file on day one. Funders don’t need a business plan. They need to see who owes you money, how old those invoices are, and whether anyone else already has a claim on them.
- Accounts receivable aging by customer, run as of this week (from QuickBooks, NetSuite or similar).
- Accounts payable aging, so the funder can see whether vendors could assert claims.
- Customer list with contacts in accounts payable, typical terms and average monthly billing.
- Sample invoices with proof of delivery, signed timesheets or approved pay applications.
- Last two years of tax returns and year-to-date financials. Losses are fine; missing records slow things down.
- Copies of any loan, MCA or lease agreements and a list of anyone who filed a UCC lien.
- Tax status: confirmation that payroll and income taxes are current, or a copy of the payment plan if not.
- Articles of organization and owner IDs for the know-your-customer check.
How fast can I get funded after a bank decline?
A clean file commonly reaches a first funding in 1 to 3 weeks. Small-ticket deals in the $50K to $500K range use lighter underwriting and can fund in about a week when nothing is tangled. Larger or more complex files, especially with existing liens that need releases, can take 3 to 5 weeks.
The things that slow a deal are almost always outside the funder’s control: a prior lender who won’t sign a lien release, a customer who won’t verify invoices, or tax liens nobody mentioned. Disclose those on the first call. A funder who learns about a federal tax lien in week three will often re-price or walk away; one who knows on day one can usually structure around it.
| Stage | What happens | Typical time |
|---|---|---|
| Intake and fit check | Aging, customer list and basics reviewed | 1–2 days |
| Term sheet | Advance rate, fee schedule and limits proposed | 2–4 days |
| Due diligence | UCC and tax search, customer credit, field exam or call | 3–7 days |
| Documents and lien work | Factoring agreement signed, prior liens released or subordinated | 2–5 days |
| Notice and verification | Customers notified, first invoices verified | 1–3 days |
| First funding | Advance wired, usually same or next business day after verification | Day 7–21 |
What will factoring actually cost compared with the bank line I didn’t get?
Factoring costs more than a bank line, and pretending otherwise doesn’t help you plan. A bank line might have run prime plus 1% to 3%. Factoring fees commonly run about 1% to 5% of invoice value per 30 days, so on a customer who pays in 45 days you might pay roughly 2% to 4% of that invoice. Volume, customer credit and how fast your customers pay drive the number.
The fair comparison isn’t factoring versus a loan you can’t get. It’s factoring versus turning down a contract, missing payroll, or taking a merchant cash advance that costs several times more. Run your own invoices through the factoring cost calculator and read how factoring rates work before you sign anything.
Right after a decline, owners get flooded with daily-debit cash advance offers. Before you sign one, compare it side by side using the MCA vs. factoring tool. The effective cost is often far higher than it looks.
Will factoring hurt my chances with a bank later?
Factoring done well usually helps your next bank application rather than hurting it. It lets you fund growth, pay vendors on time and build a cleaner year of revenue. Banks care more about trajectory and documentation than about how you financed receivables in the past.
Two things to watch. First, avoid contracts with long terms, large early termination fees or automatic renewals that make leaving expensive. Second, keep your books tight: a factor’s monthly reporting forces discipline that a bank underwriter will notice. When you’re ready to switch to a bank, the bank pays off the factor and the factor files a UCC-3 termination, much like the process in switching factoring companies.
Step by step
- Ask the bank for the specific decline reasonRequest the reasons in writing. It tells you whether to fix and reapply or move to receivables-based funding now.
- Pull your AR aging and customer listRun an aging by customer as of this week and list each customer’s terms and accounts payable contact.
- List every lien and obligationGather loan, lease and MCA agreements, and note anyone who filed a UCC lien. Disclose tax issues up front.
- Run a fit checkUse the qualification tool to see whether your customers, invoice sizes and volume fit a factoring facility.
- Compare term sheets on total costLook past the headline rate to advance rate, fee increments, minimums and termination terms before signing.
Illustrative scenario
Three-year-old janitorial contractor declined for a $400K line
A commercial cleaning company billing about $310K a month to hospitals and a county school district applied for a $400K bank line to staff two new contracts. The bank declined: a small net loss the prior year from startup costs on a big account, plus one customer at 45% of revenue.
- A factoring facility with a $500K limit and an 85% advance rate on approved invoices.
- A concentration limit of 50% for the school district given its public-sector credit, and 30% for other customers.
- Fees structured in 10-day increments after an initial 30-day period, so faster-paying hospitals cost less.
- No real estate or personal assets pledged beyond a standard validity guarantee from the owner.
Outcome: The company funded its first batch of invoices 16 days after the first call, staffed both contracts and paid payroll weekly instead of waiting 50 to 60 days on the district. It plans to revisit a bank line once it has a full profitable year on the books.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Can I get factoring if my bank just declined me?
Yes, a recent bank decline doesn’t stop most factoring approvals. Factors underwrite your customers’ credit and the quality of your invoices rather than your company’s profit history. If you bill creditworthy businesses or government agencies, a decline is often the most common reason companies start factoring.
Does factoring require good personal credit?
Personal credit matters much less in factoring than in bank lending. Funders run background and credit checks on owners, mainly looking for fraud, recent bankruptcies or unpaid taxes. Owners usually sign a validity guarantee promising the invoices are genuine, not a full guarantee of the customer’s payment.
How much can I get from factoring compared with a bank line?
A factoring facility grows with your sales, so availability is typically 70% to 90% of your eligible receivables at any given time. A company with $600K in eligible invoices at an 85% advance has about $510K available. Unlike a fixed bank line, the limit can rise as you add customers or contracts.
Will my customers know I’m factoring?
In most facilities, yes. Customers receive a notice to send payment to a lockbox or account the funder controls, which is routine for large companies and government agencies. Non-notification factoring exists for stronger files but is less common, and notification vs. non-notification factoring explains the trade-offs.
What if my bank still has a lien on my receivables?
Any existing lender with a lien on your receivables has to release it or sign an intercreditor agreement before a factor can buy your invoices. If you still owe the bank, the factor can often pay it off from the first funding. If the bank only has a blanket lien with no balance owed, ask for a UCC-3 termination now.
Is a merchant cash advance a good backup after a bank decline?
Usually not, if you have B2B receivables. Merchant cash advances are priced with factor rates and daily debits that often translate to effective annual costs far above factoring. They also tend to file liens that block better financing later, which is why so many owners end up needing to refinance an MCA.