Does My Credit Impact My Factoring Approval?

Invoice factoring is a great option for many businesses, especially ones who are just starting out, growing, experiencing cash flow problems from growth, or ones that may have had credit issues in the past. Often, businesses in these situations are frustrated or worried that they may not be able to receive the cash they need to continue their every day business activities like meeting payroll or paying other company expenses. While some factoring companies may not accept companies with poor credit, we believe there is a little more to any given situation than that.

 

What Do Factoring Companies Look for When Choosing Clients?

There are typically three main requirements any factoring company will look for when determining if they will accept a business as their client for invoice factoring:

  1. Your business’s accounts receivable must be free of any liens or contingencies
  2. Your customer must be creditworthy and capable of paying invoices within terms
  3. You must have documentation proving services rendered or product received and accepted

If your business is stable and solvent, then your past credit rating should not affect your acceptance by an invoice factoring company, even if you are just building credit or you have had credit issues in the past.

As you can see from the requirements above, your credit is not the only factor that invoice factoring companies consider when determining your eligibility. They also consider the creditworthiness of your own customers as well as your reputation for providing a good service or a good product.

Those two items determine if your customers will be able to pay their invoices that you factor with the factoring companies. In this type of interaction, your credit score has nothing to do with either party getting paid - it is all on your customer at that point.

 

If My Customers Are Paying the Invoices, Why Does My Credit Matter At All?

 

There are many factoring companies who will only approve prospective clients if they have good credit, past and present. Factoring companies like this are normally a full recourse factor. This means they will charge back the invoices you factor if they aren't paid by a certain time frame (usually 90 days).

This is why they like to ensure you have good credit - because you are responsible for paying the invoices if your customer does not, which tends to defeat the purpose of invoice factoring. 

These companies also tend to secure all your business assets for their own security in case one of your customers defaults on a payment.

This can potentially lead to problems down the road as your business grows. When factoring companies secure your business assets, they can place a blanket UCC-1 on them. This can prevent you from securing important business loans for purchases, equipment, or expansion in the future.

When you work with companies like this, you end up with a similar result as if you had taken out a business loan instead of using an invoice factoring company. Although these types of factoring companies may quote much cheaper rates initially, they end up requiring Financials. which can cost up to $20,000/year. You also end up taking on most of the risk if you are ultimately responsible for the cost of the invoices. If you add up these elements of risk and cost, you end up being in a similar situation if you had chosen a bank loan instead.

These types of factoring companies are protecting themselves by using your assets as security in the instance that your customers cannot or will not pay their invoices. You must also question how well their credit analyst will be when checking credit on your customers since you will be responsible for paying the invoices if your customers doesn't.

Because of all this, your credit as a client matters to them in addition to the creditworthiness of your actual customers. The question you must ask when considering these factoring companies is how well your account will be managed if ultimately you, not the factor or the customer, is responsible for pursuing payment from customers who fail to pay on invoices.

However, there are other factoring companies out there, such as UC Factors, who believe that factoring should help your business operate efficiently and grow, instead of being constrained.

These factoring companies will do business with many companies and their owners who have had credit issues in the past. As long as there is not an existing current bankruptcy, federal tax lien, or judgment, the client’s past credit issues will not be held against them.

We instead choose to measure a client’s qualifications based on not only their credit, but also their reputation and the services they provide. We feel this provides a more complete picture of their business as a whole.

 


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How Do I Choose a Factoring Company?