Why can startups get factoring when banks say no?
Banks usually want two to three years of history and profitable tax returns, which a new company can’t show. Factors care more about who pays the invoice. If your first customer is a federal agency, a hospital system or a national retailer, the funder is mostly betting on that payer, and those payers have long track records even if you don’t.
That makes factoring one of the few forms of working capital available to a company in its first year. It also scales: as you add customers and invoices, availability grows without reapplying. If you’ve already been turned down, what to do after a bank decline covers the broader options.
What do factors look at instead of business history?
Without years of financials, a funder builds confidence from four things: the customer, the paperwork, the owner, and the liens. A strong showing on the first two can carry a file with very little history.
| Area | What they check | How to make it strong |
|---|---|---|
| Customer credit | Payment history, size, credit reports on your customers | Bill established companies or agencies; share customer AP contacts |
| Proof of performance | Signed contract or PO, delivery receipts, approved timesheets | Attach proof to every invoice; get written acceptance |
| Invoice quality | No pre-billing, no disputes, clear terms | Invoice only for completed, accepted work |
| Owner background | Background and credit check, prior business history | Disclose past issues up front; explain them briefly |
| Liens and taxes | UCC search, federal and state tax lien search | Resolve or document any lien before applying |
| Industry experience | Has the owner done this work before? | Show prior roles, licenses or certifications |
What is a validity guarantee, and is it the same as a personal guarantee?
A validity guarantee is the owner’s promise that the invoices are genuine and that the business will operate honestly: work was performed, invoices aren’t inflated or duplicated, and customer payments won’t be diverted. It’s narrower than a full personal guarantee. If a customer simply goes out of business, a validity guarantee typically doesn’t make you personally liable for that invoice.
Some funders ask young companies for a broader personal guarantee, especially in recourse facilities, where you have to buy back invoices that go unpaid past a set age. Read which one you’re signing. Recourse vs. non-recourse factoring explains how buyback obligations work.
| Validity guarantee | Full personal guarantee | |
|---|---|---|
| Covers | Fraud, misrepresentation, diverted payments, breach of warranties | Any amount the business owes the funder |
| Customer goes bankrupt | Generally not covered | Covered if the business can’t repay |
| Common in | Most factoring facilities | Bank loans; some recourse factoring |
| Your exposure if you run the business honestly | Low | Can be significant |
What if my company has a tax lien?
A tax lien doesn’t automatically disqualify you, but it must be dealt with before funding, and it’s the issue most likely to sink a startup file if it surfaces late. A federal tax lien attaches to the business’s property, including receivables, and federal tax law can give a filed IRS lien priority over a funder’s later purchases in some circumstances. Unpaid payroll taxes are treated most seriously, because they include money withheld from employees.
Funders commonly handle tax liens in one of three ways: requiring proof of an IRS or state installment agreement in good standing, paying the lien off from the first funding, or obtaining a certificate of subordination from the IRS for the receivables. Each takes time, sometimes several weeks for an IRS subordination. Disclose any lien on the first call so the funder can plan around it rather than walk away after diligence.
Never use factoring proceeds to keep operating while skipping payroll tax deposits. Funders monitor tax compliance, and a new lien filed after closing can freeze your facility.
How big does my company need to be?
Size matters less than invoice volume. The facilities we route start at about $50K of funding capacity, which usually means at least $50K to $75K in open receivables to creditworthy customers. A company billing $35K a month on net 60 terms carries roughly $70K in receivables and is right at the threshold.
If you’re smaller, focus on your first contract: once you’re invoicing steadily, you’ll cross the line quickly. For companies in the $50K to $500K range, small-ticket factoring uses lighter underwriting and can fund a clean file in about a week.
Can I get funding before I’ve delivered anything?
Factoring requires a completed, invoiced sale, so it can’t fund work that hasn’t happened yet. A signed contract shows the funder what’s coming, but the first advance comes after you deliver and bill. Pre-billing, invoicing before the work is done, is one of the fastest ways to lose a facility.
If you need cash to buy materials or products before delivering, look at PO and inventory financing, which can pay suppliers against a confirmed purchase order. For staffing startups, the first payroll before the first invoice is the hard part; weekly billing and payroll funding shorten that gap to days.
What will factoring cost a new company?
Young companies usually pay a bit more and get a lower advance at first. Fees commonly run about 1% to 5% of invoice value per 30 days, and a first-year company with a single customer often lands in the middle of that range with an advance around 75% to 85%. Strong customers and steady volume pull the cost down.
Pricing usually improves after 6 to 12 months of clean history: invoices verified, customers paying on time, no disputes. Ask up front whether the funder will review the rate and advance after a set period, and avoid long contracts that lock in startup pricing. Model the cost with the factoring cost calculator.
Step by step
- Confirm your customers are creditworthyList your customers and their payment history. Established companies and agencies make the strongest files.
- Assemble proof of performanceGather contracts or POs, delivery receipts or approved timesheets for every invoice you want to fund.
- Check liens and taxesRun a UCC search on your company and confirm payroll and income taxes are current or on a payment plan.
- Run a fit checkUse the qualification tool to confirm invoice volume, customers and industry fit a facility.
- Compare offers on guarantee and termLook at advance rate, fees, guarantee type and contract length, not just the headline rate.
Illustrative scenario
Eight-month-old staffing company with a hospital system contract
A healthcare staffing startup placed travel nurses with a regional hospital system on weekly billing and net 45 terms. Eight months in, it was billing about $85K a week, and the founder had funded payroll from personal savings and a home equity line. The bank declined a line for lack of history.
- A $450K payroll funding facility advancing 85% on approved weekly invoices.
- Credit approval based primarily on the hospital system’s payment history and signed timesheets.
- A validity guarantee from the founder rather than a full personal guarantee.
- A review clause to revisit pricing and advance rate after six months of clean collections.
Outcome: Payroll ran from facility advances within about two weeks of the first call, and the founder stopped drawing on personal credit. After six months of on-time hospital payments, the funder raised the advance to 90% and added a second health system as an approved customer.
A composite example for illustration, not a specific client, offer or promise of terms.
Questions people ask
Can a brand-new business get invoice factoring?
Yes, if it has delivered work and invoiced a creditworthy business or government customer. Factors focus on the customer’s ability to pay rather than your company’s history. You’ll need proof the work was done and enough invoice volume to support a facility of about $50K or more.
Do I need good personal credit to factor as a startup?
Personal credit matters less than in bank lending, but funders do run owner background and credit checks. They’re mainly looking for fraud, recent bankruptcies, or unresolved tax problems. A thin or imperfect personal credit file is often acceptable if your customers are strong.
What is a validity guarantee in factoring?
A validity guarantee is the owner’s promise that invoices are real, accurate and not already pledged, and that customer payments won’t be diverted. It generally doesn’t make you personally liable if a customer simply fails to pay. It’s narrower than a full personal guarantee.
Can I get factoring with a tax lien?
Often, but the lien must be addressed before funding. Funders typically require an installment agreement in good standing, a payoff from the first funding, or a subordination from the taxing authority. Disclosing the lien on the first call is the best way to keep the deal alive.
How long does it take a startup to get its first funding?
A clean small file can fund in about a week, and most young companies fund within 1 to 3 weeks. Delays usually come from tax liens, missing proof of delivery, or slow customer verification. Having contracts, invoices and customer contacts ready speeds things up.
Will my advance rate improve over time?
Usually, yes. Many funders start young companies at a lower advance and higher fee, then improve terms after 6 to 12 months of on-time customer payments. Ask for a scheduled review in your agreement, and avoid long terms that lock in startup pricing.