As a small business owner, one of your responsibilities is to make sure that your personal credit is excellent. Your personal credit won’t only affect your mortgage, but it also affects your ability to get a loan from a bank. That’s actually one of the reasons why factoring is so popular. Even if you have a poor business credit, factoring finance loan applications still have a good chance of being approved.
The Difficulties of Getting a Bank Loan
It’s bad enough for you personally if your credit is in the toilet. Your ability to get a favorable mortgage is diminished, you have to pay for high interest on car loan agreements, your credit card interest rates can skyrocket, and so will your insurance premiums.
But when you have poor credit, your business suffers as well. That’s because among the many requirements that a bank will ask from you is your personal credit score. This is standard procedure for just about every bank. After all, your credit reflects your proven ability or tendency to pay loans on time. As the business owner, your personal credit will be mandatory if you ask for a business loan.
Factoring and Your Personal Credit
With factoring, you get your financing by using your accounts receivables. These invoices usually get you the payment from your clients in 30 (or even 60) days. But waiting for such a long time to get your payment can be problematic, especially when you have an immediate need for cash.
With factoring, you get the bulk of the value of the money right away. The factor then takes over collecting the payment from the client. Once your client has paid the factor in full, you get the rest of you money back minus the fees for the factor.
In this financing model, it’s easy to see why even with your poor business credit, factoring finance loan applications are still granted. That’s because your ability to pay the money that the factor advances to you is irrelevant.
What is important, however, is the credit of your customer who will pay back the money forwarded by the factor. That’s why the credit of your customers is crucial, because the factor won’t advance any money to you if they think your customer is likely to pay late or not pay at all.
You can, of course, still seek loans from other institutions which may be willing to lend you money even when the banks have turned you down. But there are problems here. One is that because of your bad credit the amount you receive may be too small because the lender doesn’t want to risk too much of their money.
The other problem is that the interest rate can be downright awful. It’s not uncommon for businesses with poor credit to pay as much as 40% in interest.
So if you have a poor credit history and you need financing, you may want to consider factoring. With this option, your credit scores don’t count. What matters is that you have customers with excellent credit.
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