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Building Credit through Factoring in Your Business

By Kristin Gabriel

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Published: 23Oct2010
Word count: 702
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Finance is basically funds management. The general areas of finance include personal, business and public finance. Finance is about saving money but it also includes lending, and deals with how money is spent and budgeted.

One aspect of finance is through individuals and business organizations, which deposit money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans. Ultimately, the field of finance deals with the concepts of time, money, and risk and how they are interrelated.

Why does one need credit? You never know when the need for a loan will arise, and it is a lot easier to get a loan with a good, sold credit history. Anybody without a history of using credit needs to build credit. Young adults who are just starting to learn about financial responsibilities need to build credit, and recent immigrants to the U.S. also find themselves without a credit history. A person proves creditworthiness when the credit bureaus have proof that you've consistently used credit responsibly.

There are a number of ways to build credit including retailer programs, a secured credit card, or co-signers on a credit account. Typically retailers such as gas companies, furniture stores, or some large clothing outlets offer credit plans with promotions and these are usually easier to qualify for. It's important to make sure that the retailer will report your loan to the four major credit reporting companies.

A secured credit card is where you have a credit limit that is actually a specified amount that you deposit into your account. The bank takes the risk and you slowly build credit, as long as you pay the minimum payments on time!

Another method is to get a co-signer on your first few credit accounts. A lender considers a co-signer's existing credit. They vouch for you while you build your credit. Make sure they'll report your timely payments to the credit reporting companies. Of course, you have to always pay at least the minimum before the due date.

After you build credit, you need to continually monitor it. The result will be high credit scores. The government requires that credit bureaus provide a free credit report to you annually.

There is also a way to obtain cash without providing personal collateral or increasing interest expense. Factoring - the conversion of accounts receivable into cash and it's done by selling outstanding invoices to a factoring company.

Invoice factoring is not a loan so you will not accrue penalties or interest and it will not mess up your balance sheet. The factoring fee is based on the size of the invoice you choose to factor, the creditworthiness of your customers and the length of time it takes to collect the payment. In turn, once you have some cash flow, you can use money from factoring to clean up your credit and debts it will ultimately improve your credit history. What's more this also and make it easier to obtain credit from financial institutions.

There are a few factoring companies who offer their clients a "use it as you need it" funding option, therefore every invoice purchase is a separate transaction and does not form part of a portfolio lending approach. The transaction is modeled as a buy-sell transaction. The steps for this type of factoring include:
- The Performance of Due Diligence: After being approached by a prospective client, a factor undertakes a thorough due diligence program that typically takes from 24 to 48 hours.
- The Review of Invoices: Once this due diligence is completed, the client is at liberty to offer invoices to the factoring company for purchase.
- A Credit Verification: After the receipt of the invoices, the factoring company will check the credit of the debtor named on each invoice and make sure the sale represented by each invoice has been satisfactorily complete.
- The Debtors' Notification: Once credit has been verified, each debtor is notified of the purchase by the factor and the client is paid for the invoices.
- Debtor Payments: At the end of the credit period the debtor will make payment directly to the factoring company, thus completing the transaction.

Kristin Gabriel writes for The Interface Financial Group (IFG). The factoring company provides short-term financial resources serving clients in more than 30 industries in the United States, Canada, the UK, Singapore, Australia and New Zealand. IFG offers expertise in invoice factoring, accounting, finance, law, marketing and banking.

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