“Sir,” I said, “I drive a paid-off Honda Accord. I pay all my bills on time. And my house will be paid off in three months. How could I be more credit-worthy?”
At 34 years old, I applied for a loan to purchase an investment property with 25% down, for a real estate business I started, and was surprised when the underwriter balked.
“You’re self-employed,” he said. “You still have a high debt-to-income ratio,” he added. “Send me your last two years’ tax returns, and your mortgage statement, and your first-born child’s Social Security Number,” he said.
Actually, he told me that I was going to need so much paperwork, he was going to have to back a truck up to my house to pick it up. In the end, I got approved for the loan — but not until I’d turned over a mountain of forms and waited many, many days.
Now, I think about building credit differently. I think before applying for loans or credit cards, and I also remember to pay bills and vendors on time. (Who knew those little late fees could result in dings on your credit report?)
I learned that credibility is currency — both figuratively and literally. For small businesses owners like me, as well as new businesses and entrepreneurs, working to improve your credit, and getting access to funds, can be a challenge. And, it pays to have more than a few tricks in your book when it comes to building credit.
One solution I recently learned about is called invoice factoring. This alternative funding source can help businesses access the funds they need fast, with minimum credit requirements, because it’s not a loan. As a result, you can get working capital without harming your credit. In fact, when you partner with a factoring company to factor your accounts receivable, you can build credibility with vendors, employers and contract workers, and improve your business’s credit rating. Here’s how it works:
Improve Business Credit With a Flawless Payment History
Many businesses don’t pay their bills until they receive payment from their clients. While this approach sounds less risky, because it does not involve a loan, it can land business owners in hot water when debts go unpaid, leading to late fees, litigation, and dings on your credit report that can lower your credit score. When you partner with an invoice factoring company like Triumph Business Capital, you can receive payment for your outstanding invoices in as little as 24 hours, instead of waiting 30 days or more. This solution enables you to pay your bills on time, every time, without taking out a business loan.
Improve Credibility with Vendors and Contractors
Paying bills on time doesn’t just improve your credit. It also improves your
credibility. If you don’t pay your bills on time, vendors and contractors may stop extending credit or services to your business, in favor of clients who pay on time. At the least, clients in good standing will be given preference over your account. And at worst, vendors will eventually cease doing business with you completely. When you factor your invoices, cash flow delays will become a thing of the past, enabling you to pay vendors and creditors quickly, and improve business relationships.
Access Working Capital Without Affecting Your Credit Score
Invoice factoring enables you to get cash for your business sooner, without incurring debt, or negatively impacting your credit score. In contrast, if you obtain a small business loan or other loan-based funding source, the debt will impact your credit score, as well as your debt-to-income ratio, which can make it harder to get approved for a loan.
When loans are repaid in full and on time, they can improve your credit— but if you are late on loan payments, or if you default on a loan, your credit score will drop dramatically. Invoice factoring is a sale instead of a loan, so it doesn’t affect your credit in this way. As long as your client pays their invoice, or your accounts are otherwise settled, your credit will not be affected.
It takes time to build successful business relationships and establish a trustworthy reputation — both of which are critical parts to any company’s growth. With invoice factoring, you can grow your business without hurting your credit. If you’d like to learn more, meet my friend, Blaine Waugh at Triumph Business Capital.