A business that has traded for four months has no filed accounts, no credit score worth the name and often no assets a bank would lend against. It does, however, have something invoice finance providers care about more: invoices owed by established customers. That is why factoring is one of the few funding products genuinely open to new businesses, although not without conditions.
Why trading history matters less than customer quality
A bank lending to a start-up is relying on the start-up to repay. An invoice finance provider is relying mainly on the start-up's customers to pay their invoices. If those customers are solvent, established companies with a record of paying suppliers, the provider's risk is driven by them, not by how long the supplier has existed.
Providers therefore ask a different set of questions. Who are your customers? How do they pay? Is the work complete and undisputed when you invoice? Are the invoices clearly assignable? A six-month-old company with three blue-chip customers can be a better proposition than a ten-year-old company selling to a dozen struggling retailers.
Approved debtor: a customer the provider has credit-checked and agreed to fund invoices against, usually up to a credit limit. For a start-up, the quality of its approved debtors largely determines whether, and how much, it can borrow.
What providers need from a new business
- Business-to-business invoices. Consumer sales cannot normally be funded. The customers must be companies, partnerships or public bodies buying on credit terms.
- Creditworthy customers. The provider will run its own credit checks on each debtor and set a limit. Customers with poor credit or no public information may be excluded.
- Invoices for completed work. Factoring funds a debt that already exists. Invoices raised before delivery, deposits, stage payments and work in progress are generally not fundable.
- No disputes or set-off. Clear terms of business, signed purchase orders or contracts, and proof of delivery or timesheets so the customer cannot later contest the invoice.
- Basic systems. Even a simple accounting package with a sales ledger, so the provider can reconcile invoices and payments.
- Directors with a clean history. Previous insolvencies, disqualifications or unpaid personal debts will be checked and may be decisive.
The realistic hurdles
Being eligible in principle is not the same as finding a facility on acceptable terms. New businesses should expect the following.
Minimum turnover
Many providers set a minimum annual turnover, often from around £100,000 to £250,000, and traditional whole-ledger facilities frequently start at £500,000 or more. A start-up projecting £150,000 in its first year may be below the threshold for a full facility, which pushes it towards the selective products described below.
Personal guarantees and warranties
Directors of young companies are usually asked for a personal guarantee, sometimes capped at a proportion of the facility, and nearly always for a warranty that the invoices submitted are genuine. Treat a guarantee seriously: it links the facility's risk to your home and savings.
Limited company status
Many providers only fund limited companies and LLPs. Sole traders and partnerships of two or three partners count as "individuals" under the Consumer Credit Act 1974, and a facility to them structured as credit of £25,000 or less can be a regulated credit agreement, so providers often restrict or structure their offering accordingly. If you are deciding how to set up, this is one more argument for incorporating.
Lower advance rates and higher fees
Without a track record, a provider may advance a smaller proportion of each invoice, perhaps towards the lower end of the common 70% to 90% range, and charge a higher service fee. Costs vary widely by provider; our costs guide explains the components.
Concentration
Start-ups often depend on one or two customers. Providers commonly cap exposure to a single debtor at around 25% to 30% of the ledger, so a business with 80% of its sales to one customer may find only part of its invoices fundable.
Selective and spot options for new businesses
The products most accessible to a young business are those that do not require the whole ledger or a long commitment.
| Structure | Typical fit for a start-up | Watch out for |
|---|---|---|
| Spot factoring | Fund a single large invoice when needed. No ongoing commitment, so suits irregular or project-based sales. | Higher cost per invoice; each transaction is underwritten separately. |
| Selective invoice finance | Choose which invoices or customers to fund on an ongoing basis. Low or no minimum turnover with some providers. | Only strong debtors will be accepted; fees are usually higher than whole-ledger facilities. |
| Full factoring | Whole ledger funded, provider runs credit control. Useful once turnover is steady and there is no finance team. | Minimum turnover and minimum fees; typically a 12-month contract with notice. |
| Invoice discounting | Rarely offered to start-ups because it relies on the client's own credit control and systems. | Usually requires established processes and higher turnover. |
Start-up specific risks
Why it can work
- Funding is linked to customers' creditworthiness rather than yours.
- The facility grows as sales grow, which fixed loans cannot.
- Factoring includes credit control, which many new businesses lack.
Why it can go wrong
- Thin margins: if your gross margin is 10% and the facility costs 3% to 4% of turnover, the cost is a large slice of profit.
- Recourse: under a recourse facility, an unpaid invoice comes back to you after the recourse period, typically 90 to 120 days, at a stage when a new business has little to absorb it.
- Dependence: building the business around funded cash flow makes it hard to leave the facility later. Check the notice period before signing.
- Disclosure: with factoring, customers are told. For a new supplier this can occasionally raise questions, although it is common practice.
Alternatives worth considering
- Start Up Loans. The government-backed Start Up Loans scheme, delivered through the British Business Bank, offers personal loans to people starting or in the early years of a business, with mentoring. It funds launch costs that factoring cannot.
- Grants. Local growth hubs, innovation bodies and some local authorities offer grants for specific purposes. They are slow and competitive but do not need repaying.
- Shorter payment terms. The cheapest working capital is a customer who pays in 14 days. Our guide to invoice payment terms covers how to negotiate them.
- Deposits and staged invoicing on project work, which cut the gap you need to fund in the first place.
The honest answer for many start-ups is a combination: a loan or own funds to launch, strict payment terms from day one, and a selective facility once invoices to good customers start to build. Our comparison of invoice finance and business loans sets out the trade-offs.
Example: a six-month-old recruitment agency
A recruitment agency incorporated in April supplies temporary warehouse staff to two national logistics companies. By October it is invoicing £45,000 a month on 30-day terms, but customers pay in 45 to 50 days while the agency pays its workers every Friday. Each week it needs about £8,000 for wages before any customer money arrives. The founder has used savings and a credit card and is at the limit of both.
Illustrative example A selective factoring facility against one month's invoices
- Invoices submitted (October)
- £45,000.00
- Both debtors approved, within concentration limit
- Yes
- Initial advance (80%, reflecting short history)
- £36,000.00
- Service fee (2.5%)
- £1,125.00
- Discount charge (illustrative, about 45 days outstanding)
- £355.00
- Balance released when customers pay
- £7,520.00
- Estimated total proceeds
- £43,520.00
Figures are illustrative estimates only and do not represent a finance offer.
The £36,000 advance covers four weeks of wages with room to spare, at a cost of about 3.3% of the month's invoices. The founder signed a capped personal guarantee and the facility is recourse, so if either logistics company failed to pay within 120 days the agency would have to repay that advance. For a business with a gross margin of 20% to 25%, the arithmetic works. For one on 8% margins it would not. See the recruitment industry page for the sector's payment mechanics in detail.
New business with good customers?
Tell us who you invoice and how, and we will explain which selective or factoring options may be open to you.
Frequently asked questions
How long does a business need to have been trading to get invoice factoring?
There is no fixed rule. Some providers will consider a business from its first invoice, provided it sells to creditworthy business customers on credit terms and the directors have a clean history. Others want three to twelve months of trading or a minimum turnover. Selective and spot products are usually the most accessible for very new businesses.
Can a sole trader start-up use invoice factoring?
Some providers will fund sole traders and small partnerships, but many prefer limited companies. Sole traders and partnerships of two or three partners are treated as individuals under the Consumer Credit Act 1974, and a facility structured as credit of £25,000 or less can be a regulated agreement, so providers often restrict or structure facilities accordingly.
Will I need to give a personal guarantee as a start-up director?
Very often, yes. Providers commonly ask directors of young companies for a personal guarantee, sometimes capped, and almost always for a warranty that the invoices submitted are genuine. Read the guarantee carefully and take advice, because it means the facility's risks can reach your personal assets if the company fails to meet its obligations.
Is invoice factoring better than a Start Up Loan?
They solve different problems. A Start Up Loan is a fixed personal loan, repaid over a term, that can fund equipment or launch costs. Invoice factoring releases cash from invoices you have already raised and grows with sales, but it only works once you are trading on credit terms with business customers. Many young businesses use a loan to start and invoice finance once sales build.