Is Your Credit Score Affected by Factoring?
When your customers are late on their payments and your vendors want you to pay them immediately, your finances can become a mess. One method for meeting your financial obligations is to sell your accounts receivable. By selling your customers’ invoices to a third party, known as a factor, you receive payment for your invoices early. The factor makes a profit by giving you a percentage of the invoices immediately and then receiving your customers’ full profit whenever they pay their bills. This process, known as factoring, gives you the capital you need to avoid late payments. However, you may worry that it will hurt your credit score. Thankfully, if you complete the process correctly, selling your accounts receivable does not adversely affect your credit score.
On its own, selling your accounts receivable has no effect on your credit score because you do not go into debt when you use this form of financing. It is not a line of credit or a credit card, so you do not prove your ability to pay off interest in time. Whether or not your customers pay the factor back in time also does not impact your credit score.
While the process does not directly affect your credit score, selling your accounts receivable can improve your score if you do so properly. First, turn to factoring before you open a new line of credit or take out a loan. By using credit as a last resort, you avoid putting yourself in a situation where you cannot keep up with your debt repayments.
Another way that selling your accounts receivable helps your credit score is that the working capital you access allows you to remain current on all your bills. If you are regularly late on payments, vendors will not trust you. They may stop giving you discounts or even end your working relationship. To avoid developing a bad reputation, use your factor’s advance payment to pay your bills and the interest on your loans. Over time, this improves your credit score and increases the likelihood that other companies will work with you.
Improving your credit score is a complicated but essential part of running a business. While you can increase your numbers directly by opening bank accounts in your company’s name and registering for a Duns number, you can also do so indirectly through processes such as factoring that help you maintain your business without going into debt.