Factoring Your Way To a Better Credit Score

Credit scores account for debt-to-income ratio as well as payment timeliness and financing for cash flow is often unsecured debt, so relying on credit products can affect your score. Since factoring does not show as debt on a credit report, you can use it to improve your financial health while optimizing your score.

Reduce Dependence on Credit Lines

Lines of credit are great when you can use their grace periods for short-term cash, but if you have to carry a balance, they get expensive. When you have to regularly rely on credit lines to the point where some months the balance is only partially covered, another product can help you move away from that pattern so that you can reassign your credit lines to a more viable role in your financial processes. That also helps you better optimize their perks and lower your overall cost of financing, because maintaining a lower balance on your unsecured debt makes other loans less expensive.

Create a Strong, Disciplined Budget Process

When you know you can rely on factoring for regular pay dates, you have the opportunity to set term budgets and then discipline your business to them. This can help reduce waste, but you need to remember that drastic increases in order size that bring new business will also lead to budget overruns. That means you need to understand when to allocate additional working capital and when to insist on budgetary discipline. If your business is growing, the next budget should move closer to the new reality, but you still have to deal with your current one.

Curate Your Client Lists To Avoid Payment Issues

The biggest reason this service does not appear on your credit report is because you essentially sell a debt owed to you onward. You aren’t taking out a cash advance, you’re eliminating items from your receivables ledger. That means factoring can lower your administrative costs, but it also means that customers who skip the bill can hurt your relationship with a service provider.

To use this tool as a viable long-term strategy to manage cash flow, you need open communication between your business and the provider. Understanding which customers are not worth keeping can lower your costs for future deals, and it also helps you reserve your project time for the clients who actually help you pay the bills. With the right pattern of invoice submissions and client list curation, you can use this tool to build your credit score all the way up if you want to.