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Can Invoice Factoring Improve Your Credit Score?

Truckers and truck drivers are the backbone of commercial trucking. The industry moves billions of dollars’ worth of goods every single day, which is largely thanks to the hard work and skills of those behind the wheels. 

But even the most experienced and reliable drivers can sometimes find themselves in a tight spot financially. If your trucking company is struggling to make ends meet, invoice factoring providers could be a way to improve your business credit score and get back on track. 

Invoice factoring comes into play when a company sells its accounts receivables, or unpaid invoices, to a third party in exchange for cash. This cash advance, which is equal to the total invoice amount, can be a great option for small business owners, especially compared to traditional bank loans that come with a number of credit checks and additional fees. 

Factoring, or invoice discounting, is a type of financial option that allows people to access cash upfront, making it possible for the business to pay bills on time and positively impact the business’ credit score.

What Is a Business Credit Score?

A business credit score is a three-digit number that represents the financial health of your business. Just like your personal credit score, your business credit score will be used by lenders to determine whether or not they can comfortably offer you credit for your business. 

However, unlike a personal credit score, a business credit score is not based solely on your personal financial history. Instead, it is based on the financial history of your business. This includes factors such as payment history, length of credit, overall credit history and outstanding balances. 

Business credit scores are important because they give lenders a quick and easy way to assess the risk of lending money to your business. The higher your score, the lower the risk for creditors and the more likely you will be approved for financing. 

Therefore, if you are planning to apply for a loan or a line of credit, it is essential that you make sure your business has a strong credit score. You can do this by maintaining a good payment history and keeping your outstanding balances low.

How Does a Business Credit Score Work? 

Several factors contribute to a business credit score, including payment history, credit utilization, and length of credit history. Let’s take a look at how some of the following criteria have an impact:

Longevity

Longevity is the length of time a business has been in operation. It is one of the factors that both lenders and creditors look at when determining whether to extend credit to a business. The reason for this is that businesses with a longer track record are more likely to repay their debts. 

These types of businesses also tend to have established relationships with suppliers and customers, making it easier for them to obtain financing and yield profits. Longevity can also signify stability and success, both of which are attractive to lenders and creditors. In short, longevity is an important factor in business creditworthiness. 

Revenues

Several factors can cause a business’ credit score to drop, but one of the most common reasons is a change in revenue. If a company’s revenue decreases, it can have a ripple effect that negatively impacts the company’s credit score. 

This is because businesses that generate less revenue are considered riskier by lenders, and as a result, they often have to pay higher interest rates on their loans. In some cases, they might even be denied loans altogether. A decrease in revenue can also lead to late payments, which can further damage a business’ credit score.

Assets

Assets are essential for businesses of all sizes because they provide collateral that lenders can use to recoup their losses if the borrower defaults on the loan. Additionally, assets can also help businesses get better terms on their loans, seeing as assets can serve as a form of a down payment. 

As a result, assets play a vital role in business credit. Any business looking to improve its creditworthiness should therefore focus on building its network of assets.

Personal Credit Score

Your personal credit score has an impact on your business credit. If you have a high personal credit score, it will be easier to be approved for loans and lines of credit. You will also likely get better terms, such as lower interest rates. 

On the other hand, if you have a low personal credit score, you may be denied loans or lines of credit altogether. Otherwise, you will likely be offered unfavorable terms if you are approved, such as higher interest rates. 

This can make it difficult or even impossible to finance your business. So, if you’re thinking about starting a business, it’s important to check your personal credit score and make sure it’s in good shape. 

Business Loan History

Business loan history is important for two reasons. First, it helps lenders determine whether a business is a high credit risk or a low credit risk. 

Second, it can affect the terms and the conditions of a loan. Lenders use business loan history to assess both the probability of default and the amount of loss that could arise if a default occurs. 

This information is then used to set the interest rate as well as the other loan terms. By making timely payments and maintaining a good credit rating, businesses can ensure that they will have access to affordable financing in the future.

Public Records

Public records can have a significant impact on business credit. Lenders often review public records when considering if they will offer a loan or line of credit to a business. If the business has a history of late payments, liens or bankruptcies, these details will likely impact the lender’s decision.

Industry Risk

Industry risk is the risk that businesses in a particular sector will experience financial difficulties, which will ultimately likely lead to them defaulting on their loans. Lenders will often use industry risk scores to assess how likely it is that businesses in a particular sector will experience financial difficulties. The higher the industry risk score, the greater the level of risk for lenders.

Can You Use Invoice Factoring If You Have Poor Credit?

If you have poor credit, you may think that business financing is not on the list of financing options for you. However, this is not necessarily the case. While it is true that some invoice factoring services will not work with businesses that have poor credit, many others are willing to take on the risk. 

Despite the challenges, invoice factoring can be a viable option for various types of businesses with poor credit. It can even be a way to get your business back on track and repair your credit. If you do your research and find a reputable factoring company, you can get the funding you need without having to worry about your credit score. 

Benefits of Invoice Factoring For Adverse Credit

One of the main benefits of invoice factoring as a form of financing for businesses with adverse credit is that it provides said businesses with an infusion of immediate cash flow. This can be used to cover operating expenses, make payroll or invest in new equipment and inventory. 

Invoice factoring also allows businesses to choose when they receive payments, which can help them manage their finances and ensure a constant cash flow. In addition, businesses that use invoice financing often see an improvement in their credit scores over time. 

This is because invoice factoring can help businesses improve their payment history and reduce their outstanding debt. As a result, invoice factoring can provide many benefits for businesses with adverse credit.

3 Ways Invoice Factoring Can Improve Your Credit Score

Need more convincing? Let’s explore a few more ways that factoring can help your business. 

Get Capital Without Impacting Credit

If you’re looking for a way to get working capital for the invoice value minus a factoring fee, all without impacting your credit score, an invoice factoring company may be the perfect solution for your business. The fee is known as the factoring rate.

This is the overall pricing, which can help you understand what the factoring cost will be on each invoice. In exchange for a quick injection of capital, a business will agree to give up a portion of the money it would have otherwise earned on the invoice when it is eventually paid by the customer. 

For businesses that are struggling to secure traditional financing, invoice factoring can be an invaluable tool that makes it possible for them to meet their business needs. Not only does invoice factoring provide much-needed capital for business bank accounts, but it also won’t impact the business’ credit score just for signing up. This makes it an ideal solution for small businesses and startups that may not have an established credit history yet.

Build Your Credibility 

When you’re just starting out and don’t have much credit history, invoice factoring can help. The prompt and regular cash flow a factoring company can offer can provide you with much-needed cash flow and help you build your credibility with creditors. 

It can also allow you to keep operating your business smoothly, giving you credibility with your customer base. In turn, this can lead to better terms and conditions on future loans, making it easier for your business to grow and prosper.

Practice Good Payment Habits

As previously discussed, the reason businesses run behind on payments is often that they don’t have money on hand. They are still waiting to be paid from previous jobs that do not pay out for 30, 60 or even 90 days. A factoring company can get you paid for your outstanding invoices, giving you the financial stability you need to make your payments on time and regularly. 

Factoring Might Be the Answer You’re Looking For 

Whether you just need more reliable cash flow, a better business credit score or a higher level of credibility all around, invoice factoring can be a valuable tool for your business. 

Don’t just choose anyone because you will likely get hit with hidden fees as part of the invoice factoring agreement. Instead, if you want to learn more, contact a reputable factoring company today to see how receivable financing can help your company grow and thrive. 

FAQ

Is Invoice Factoring Worth It?

Yes. Factoring is a major financial tool that can aid your business in terms of operations and overall growth.

Is Factoring Considered Debt?

No. Factoring is not generally considered as a loan. Debt is not issued nor acquired as part of the initial transaction.

Does Invoice Factoring Improve Credit Scores?

Using invoice factoring alone will not improve your credit score. However, it does give you the business capital you need now to operate your business in a manner that will improve your credit score.

TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and 1-Hour Advance option.

TAFS is More than Freight Factoring

As one of the industry leaders, TAFS assists trucking companies to increase cash flow with some of the lowest factoring rates in the industry and 1-Hour Advance option.