Authored by Phil Cohen
Having a strong credit history can give your business access to the funding it needs to grow and expand. However, if you’re just starting out or you’ve had some tough experiences with credit in the past, it can be tough to build the credit you need. Factoring not only provides you with immediate capital, but it can also help you strengthen your credit profile. Learn how you can set your business up for success in the long term with factoring.
The Link Between Factoring and Creditworthiness
When a business factors its invoices, it sells them to a factoring company in exchange for cash up front. The factoring company takes over the responsibility of getting customers to pay, charging you a fee for the service.
Factoring provides immediate access to cash, but it is not debt.
A business’s creditworthiness measures how responsible it is financially. Does it pay its vendors on time? Can it be trusted to repay its debts? A business with good credit will find it easier to be approved for a loan and may be able to secure more favorable terms, too.
But when a business has a bad credit profile, that can make it much more difficult to access credit or loans, which then makes it difficult to expand.
How Factoring Can Improve Company Credit
Inconsistent cash flow can hamper your business’s ability to pay its bills on time, which can drag down your business credit score. But factoring may be able to help.
Factoring provides a fast infusion of cash your business can use to meet payroll, pay for supplies, even buy fuel or inventory without waiting weeks or months for your customers to pay. It’s a flexible solution that can help your business meet its obligations. Here are several ways factoring can build your business’s credit profile.
Ensures Timely Payments
When your company’s revenue is locked up in unpaid invoices, you may not have the cash flow you need to pay the bills. Factoring companies buy those invoices and front you the money so you can pay what you owe on time, preserving your relationships with your suppliers and creditors.
With today’s uneven labor market, supply chain inconsistencies and unpredictable payment cycles, fast access to working capital is key to staying competitive.
Reduces Dependence on Debt
Your first instinct when you need to cover expenses may be to take out a loan or max out a card. However, short-term, high-interest debt can add up fast, and if you can’t make those payments, either, the results can be devastating to your company’s credit.
Unlike loans and lines of credit, factoring isn’t debt, and it won’t add to your liabilities or cost you in finance charges. Plus, the less you borrow, the higher your debt-to-income ratio, which is a key factor companies like Dun & Bradstreet use when calculating your business credit score.
Builds a Positive Payment History
One of the most significant factors that credit bureaus look at when determining credit scores is your payment history. A consistent track record of paying bills on time will strengthen your company’s credit over time. By using factoring to stabilize your cash flow, you can ensure that you maintain a clean, positive payment history, even during periods of slower revenue.
Another key factor credit agencies consider is your payment history. A track record of consistent, on-time payments shows you’re a reliable borrower, and it is one of the best ways to boost your credit score. Factoring can provide you with a steady cash flow that allows you to make all of your vendor and creditor payments on time.
The Bottom Line
With a strong credit history, your business will enjoy better access to capital and be able to take advantage of more opportunities, no matter when in the payment cycle they arise. Factoring can be a tool for your business to not only meet its financial obligations but raise its credit profile in the process, too. If you have big long-range plans for your business, consider how this flexible form of financing can help you meet two goals at the same time: better credit and bigger growth.
Ready to explore factoring? Connect with the right factoring company for your needs.