Many business owners who have never used invoice factoring or who might not be familiar with how it works, might assume that it would have a negative impact on their business credit score. In fact, according to Thales Financia, a Utah invoice factoring company, this is one of the most common misconceptions that people have regarding factoring. They say, however, that far from negatively affecting your credit score, the process of factoring your invoices could actually have a positive impact. Below we discuss how.
What Will Invoice Factoring Mean for Your Business?
Having a healthy credit score is important for a business. It means that they are looked on favorably by lenders and it also means that new suppliers will see them as safe to do business with. With a good credit score, a business can access favorable interest rates from lenders and can get good credit terms from vendors.
To build up your credit score, you will need to be in a position to pay your own bills on time as overdue payments can have a negative impact. But what if your business is having cashflow issues? This is often why some business owners struggle to make payments on time to their vendors. If they are waiting for their own customers to pay, it can leave them struggling, especially if they have given their own customers more favorable credit terms than they have from their own suppliers.
For example, imagine a business has given its customers 60 days to pay but only has 30 days to pay its supplier. This means that the business’s invoices will be due for payment before they get any money from their customers. This will inevitably cause cashflow problems. It is particularly true for newer companies that have not had the time to establish their business and garner a healthy cashflow.
Step in invoice factoring. Businesses that factor their invoices can access funds much more quickly and will be in a position to pay their bills on time. Some will even pay them early to avail of discounts from their suppliers. These discounts can often be used to offset the fees charged for factoring. A business that continually pays its bills on time will inevitably see its credit score increase.
Do You Need a Good Credit Score to Access Invoice Factoring?
Another misconception is that a business needs to have a good credit score to access invoice factoring. This is not the case. Factoring companies do not assess the credit worthiness of a business factoring its invoices. They look at how creditworthy the business whose invoice is being factored is. So this means that new companies with little credit history can still factor their invoices, provided they factor invoices from a creditworthy company.
The Bottom Line
Invoice factoring for small businesses is immensely popular because it allows them to pay their bills on time, which in turn enhances their business credibility. The ability to access capital without it having a negative impact on credit score is very appealing, particularly for newer businesses that are in the process of trying to make their score healthier.
Most new businesses are unable to access funding through a bank or other lender because they don’t have the credit history that allows the lender to see if they are a safe bet. But with invoice factoring, businesses can quickly access cash to pay their suppliers on time. Regularly paying on time is what improves a business credit score. And the great thing about invoice factoring is that your business doesn’t actually need to have a good credit score to be able to use it.