Do the Cs of Credit Matter for Factoring?

October 18, 2016

You’ve probably heard of the five Cs of credit before. They are character, capacity, capital, collateral and conditions. These are the items that a lending company looks at to help determine if they’ll provide the capital you’re requesting.

In this post, we’ll explain the five Cs of credit and how they matter when applying for a business loan or line of credit and if they matter for alternative business lending option such as accounts-receivable financing, commonly referred to as factoring.

5 Cs of Credit

1. Character

Business Loan or Line of Credit: Typically a lender such as a bank will look at the character of the person and business requesting the capital. Factors such as background information and overall character will come into play. Credit is also a part of this. If you have less-than-perfect credit or no credit at all, it may be difficult to get the funding needed.

Accounts-Receivable Financing (Factoring): Accounts-receivable financing does not look at your personal or business credit like a traditional lender does.  Your factoring company looks at the credit of your customers to make sure they’ll pay for the product or service you provide.  Factoring companies are more understanding of and flexible with personal credit history and background- less than perfect credit is not an issue.

2. Capacity

Business Loan or Line of Credit: When you request to borrow money from a bank, they’ll want to know how you intend to pay the amount back. Among other documentation, standard requests include documents such as financial statements to ensure that you’ll have sufficient funds to pay back the loan or line of credit.

Accounts-Receivable Financing (Factoring): Financials are not always a requirement for factoring – as long as you’re working for credit-worthy customers (which you want to be), there are no real limits when it comes to accounts-receivable financing. Your capacity for the amount of working capital provided is dependent upon the amount of work and contracts you have, and your factoring company can grow with you. Scale Funding wants to make sure that you’ll be paid for the work you do. If your customers are credit-worthy, there are no issues regarding capacity.

3. Capital

Business Loan or Lines of Credit: The bank wants to know how much capital you personally have invested in the business. Because the bank is basing its decision on that, if you default on the loan or your business fails, they’ll want to make sure they have a way to get the money borrowed back.

Accounts-Receivable Financing (Factoring): Scale Funding wants to make sure your business is on the path to success, but again, we’re more concerned with your customers paying you for the work you do. As long as your customers pay for the work you provide, capital shouldn’t be an issue as you’ll have a steady stream of cash to reinvest in your business.

4. Collateral

Business Loan or Line of Credit: If you default on your loan, the bank wants some way of collecting back the amount you borrowed.  Banks have no additional means to recouping these funds except for the assets that are tied to the line.

Accounts-Receivable Financing (Factoring): From the start, Scale Funding offers added services like credit analysis and risk assessment to ensure that the people you are working for have the ability to pay you.  Our collections team and online reports give you access to payment status- you will know of any potential issues before a plan is made to get invoice payment and clear up any hold-ups going forward.

5. Conditions

Business Loans or Lines of Credit: Why do you need the loan or line of credit? The bank will want to know this information so that they know the money they lend to you is put to good use.

Accounts-Receivable Financing (Factoring): Many times, we ask our customers why they need quick cash. Often, it’s to bridge their cash-flow gap that is caused from slow-paying customers. When they’re waiting 30-90 days for payment, it makes it difficult to keep up with bills, pay employees and invest in new resources.

Do the Cs of Credit Matter?

So, what is the answer to the question, “Do the Cs of Credit Matter for Factoring?” The answer is yes, they do matter. However, many of the Cs are looking more at your customers rather than you and your business.

If you’d like to learn more about accounts-receivable financing and how it can provide your business with the funding needed, contact a financial expert at Scale Funding today. 800-707-4845.