Does Invoice Factoring Affect My Credit Score?

Last Updated April 27, 2023

Successful business owners know how important their business credit score is.

Building and maintaining a solid credit score is crucial for businesses as it can impact their ability to access capital as well as their credibility with vendors and customers. However, as less established businesses work to build their credit score, their access to traditional bank financing may be limited if they don’t have a long operating or payment history. For these businesses, invoice factoring is a viable option for obtaining access to capital but some businesses may be reluctant to utilize it for fear of affecting their credit score.

But, when business owners better understand what goes into calculating their credit score and how factoring works, they discover that, not only does invoice factoring not affect their credit score, it can indirectly help it in the long run.

How Your Business Credit is Scored

There are three business credit bureaus – Experian, Equifax, and Dun & Bradstreet – that collect information such as your business’s financials, banking and collection history, and history of liens and judgments. Each credit bureau uses its own factors and formulas to calculate your credit score, which they refer to as a risk score. The most heavily weighted factor in risk scoring is your business’s payment history. The quickest way to build your credit score is by never missing a payment.

Unlike a personal credit report which requires your authorization to release, anyone can access your business credit report. A customer, vendor, or lender can view your financial relationships along with your borrowing and payment activities.

Because invoice factoring doesn’t involve lending – it’s a sale transaction that exchanges cash for your business’s outstanding invoices – it’s not reported to the credit bureaus. It is not considered to be debt, so it doesn’t impact your debt-to-income ratio. While some factoring companies might check your credit report for background information, it is not treated as a lender inquiry, so it won’t have a significant impact on your credit score.

How Invoice Factoring Affects Your Credit Score

The bottom line is invoice factoring does not impact your business credit score. In fact, there are several ways it can help you to build your score.

1) Helps to ensure you maintain an on-time payment history

If you are cash flow conscious, you may have a tendency to wait until your customers pay you before paying your bills. However, if you run into a cash crunch, you risk missing a payment. When you have a factoring relationship, you can simply sell your invoice as soon as it’s issued and receive the cash within a day or two. You maintain an on-time payment record while keeping your working capital balance flush.

2) Enhances your business’s credibility

Vendors, contractors, and customers are always concerned about the credibility and reputation of the businesses they work with. If your business is known for periodically missing a payment, your relationships can sour. Vendors could decide to stop extending credit or stop doing business with you altogether. Customers could become concerned about your credibility and contractors could decide there’s too much risk in working with your business. When you keep your cash flowing through factoring, you can pay your vendors and contractors on time, or early, which enhances your business’s credibility and strengthens your relationships.

3) Get capital without hurting your credit score

When you obtain bank financing, your business credit score is impacted negatively. Carrying any amount of debt can hurt your score, especially if your debt-to-income ratio increases too much. If you apply to multiple banks, the credit inquiries can also hurt your score. With factoring, you aren’t incurring debt and the transaction doesn’t require any credit check because the factor relies on the creditworthiness of your customers.

The bottom line is, by utilizing factoring, you keep your credit report clear of unnecessary debt, which can position you more strongly when you are ready to seek traditional bank financing in the future.

What if My Business Credit Score is Already Bad?

While you always have the chance to improve your credit score, it could take time, which is why invoice factoring is an ideal solution for your working capital financing needs. That’s because your credit score is not even a consideration when applying for a factoring account. Factoring companies are more concerned with the creditworthiness and financial strength of the customers who are paying your invoices. If you are B2B business with customers who have a track record of on-time payments, you can qualify for invoice factoring.

We invite you to learn how altLINE, with its 80 years of experience serving customers, can partner with you to eliminate your cash flow concerns and grow your business.