One of the major challenges facing many small businesses is a bad credit score. With a bad credit score, it becomes difficult for lenders to give you loans or for investors to put money into your business. Therefore, most companies depend on the money paid by customers to run their business until they correct their credit scores. But still, an invoice can take up to 30 days before they’re paid. Therefore, you’ll need to look for other ways to finance your business and keep running.
Another great way to finance your business is through invoice factoring. This financial transaction allows your business to sell its invoices to a third party at a discount. Instead of waiting for the invoice to be paid, you transfer the invoices to another party, who then pays you a percentage. However, most business owners are still concerned that bad credit can affect invoice factoring. Therefore, this article will discuss it in detail below.
What Is Invoice Factoring
Invoice factoring is a way that businesses can get money from factoring websites like revinc.com and other similar ones while they wait for customers to pay their invoices and other receivables. It’s a process where you factor your bills into your business’ budget, and then the company gets the money it needs to cover the costs. Factoring is great for companies that need to cover expenses quickly. Factoring can also be helpful for businesses that are in a hurry or don’t have enough money to pay for everything they need.
The factoring company will give you a certain percentage of your invoices and then collect the invoices on your behalf. Once the payments on the invoices are made, the factoring company will give you the remaining amount in the invoice minus the service fees.
Does Bad Credit Matter
Factoring companies do not care about bad credit for invoice factoring. They care about the credit history of your customers. This is because they are not providing you with a loan. They purchase your receivables at a discount and assume all liability if the customer does not pay on time.
However, factoring companies can use your personal credit history and a few other factors to set your interest rate. Still, typically it’s not as important as when you apply for a traditional bank loan or line of credit.
Because they are purchasing your accounts receivable, factoring companies place more emphasis on the creditworthiness of your customers than on yours. However, they may still do a credit check on you before approving you as a client. Generally, if your customers pay their bills and your business is profitable, you can qualify for invoice factoring even with poor credit.
However, if you’re new to factoring and haven’t established a history with a specific factoring company, they may be more interested in your firm’s financial strength. But once a relationship is established, the focus will shift almost entirely to your customers.
The primary way your credit score matters to factoring companies is that it could affect their ability to recoup money from you if you default on your agreements with them. If you’re insolvent or on the verge of bankruptcy, a factoring company won’t get its money back from you even if it does collect from your customers.
Do Factoring Companies Do A Credit Check
Some invoice factoring companies do not do a credit check. These are called non-recourse invoice factoring companies. A non-recourse factoring company assumes the risks of non-payment. Although most invoice factoring companies will do a credit check on your company and your customers. On the other hand, recourse invoice factoring companies are the type that don’t assume the risk of non-payment. So, if the customer defaults on payments, the factoring client will have to pay, so a credit check is essential.
If your business has a bad credit rating, it’ll be best to seek the services of a non-recourse factoring company because they take the risks that your customer may not pay their bills, and they can’t come after you for the money if that happens. The only drawback to a non-recourse factor is that they usually charge more than other factoring companies due to the additional risk they are taking on.
Does Invoice Factoring Affect Credit Score
While factoring companies do not have direct access to your business credit score, they give you access to a stable cash flow. You get enough money to run your business and become less dependent on credits and loans. Moreover, you can get enough money to pay back loans and make credit card payments.
Remember that one cause of poor credit score is late payments. However, you’ll make payments in time and correct your credit score by using invoice factoring. Moreover, you can reserve your funds for other investment opportunities by being less reliant on credits. Invoice factoring helps you manage your credit lines responsibly and improves your score.
Benefits Of Invoice Factoring
Besides being able to receive money to run your daily business operations, invoice factoring has several other benefits, such as the following:
- Accessible – As we noted above, you don’t need perfect credit or even any credit to get approved for invoice factoring. That makes it possible for many businesses that are having a hard time getting approved for traditional financing options.
- Fast funding – With invoice factoring, you get access to funds faster than with any other type of financing. It can take as little as 24 hours from application to receiving payment on your first invoice — and faster once you’re already established with the factoring company.
- Flexibility – This type of financing is flexible enough to accommodate companies of almost any size.
- Simple approval process – Because factors only care about the creditworthiness of your customers, it’s much easier to get approved for invoice factoring than for traditional loans and lines of credit.
Predictable and consistent cash flow is an integral part of any business. One way to get the finances of your business is through invoice factoring. As discussed, the factoring companies primarily considers the creditworthiness of your customers, therefore, you can still get funds even with bad credit score. Moreover, it gives you control of your credit, which can help increase your financial rating score.