If you run your own small business and have clients that sometimes take their time paying their invoices, you may have considered working with a factor to get an advance on the invoice amounts, which you can then use to cover your expenses. However, you may have wondered whether factoring could potentially impact your personal or business credit scores. Since the actual transaction itself doesn’t technically involve credit, the answer can be a bit complicated. Read on to learn more about how using a factor could potentially affect your credit score.
Start With a Good Business Credit Profile
When it comes to getting any loan, your credit score is likely to be taken into consideration. In order to build your creditworthiness, you’ll have to have a business credit profile separate from your personal one. You can do this by opening a business line of credit and checking and savings accounts in your company’s name. Over time, you start to build a history of handling credit and can make yourself a more attractive prospect to potential lenders.
Build Credibility With Partners
When you get an advance from a factor, you’ll have to repay it once your customer invoice is paid. If you can pay these invoices on time, or even ahead of schedule, that shows factors, or any other companies you may be working with, that you are trustworthy, credible and reliable. This credibility can go a long way in terms of potentially helping you secure better credit offers in the future.
Get Cash Flow Without Using Up Credit
One of the benefits of factoring is that it allows you to access much-needed working capital to keep your operations up and running without having to use credit. Since it’s better to use less of your available credit, this lets you get the cash flow your company needs without potentially impacting your credit score by using more than 30% of your credit line.
Build Up Your Payment History
If you have invoices of your own that need to be paid to other companies, you can use the cash advance from a factor to pay on schedule or ahead of time. This is a simple way to build up a perfect payment history, which can help you quickly improve your business credit profile.
While factoring is not technically a loan, there are some indirect ways in which working with a factor can impact your credit score, potentially for the better. Keep these key facts in mind and you can navigate the process with confidence.