One of the new business owner’s priorities needs to be increasing his or her company’s credit score. Without a good credit score, the business will not be able to take out loans or make credit card payments without paying an exorbitant amount of money. Part of this process involves taking out credit cards for the business and using them. However, it is just as important to pay all of the company’s bills on time.

Late payments will break down the company’s relationship with vendors and lower the company’s credit score. While taking out loans to make payments on time is not the optimal course of action, another kind of finance called factoring can help new businesses stay on top of their bills.

This method of finance involves selling accounts receivables, or invoices for payments from clients that the company will receive in the future. A third party agrees to buy the invoice at a discounted price and gives a portion of the money to the company immediately. The company can then use this capital to pay vendors and keep up with other expenses. Finally, once the clients pay the company for its services, the company sends the rest of the agreed-upon sum to the third party. Generally, the third party, called the factor, makes a small profit from the procedure thanks to the discount.

Although factoring involves an exchange of money and repayment, it is not a type of loan. The factor does make a profit from the agreement, but the extra money does not come from interest charged on top of the capital. Additionally, the company is not borrowing money from the factor but rather receiving cash in advance that it would have received shortly afterward. Because this type of financial agreement is not a loan, it does not directly affect a company’s credit score. However, failing to send the factor the money from the clients’ payment when it arrives could still have negative effects, including the loss of a business relationship and even legal action.

For new businesses that need to make payments in a timely manner and have the guarantee of more capital coming in soon, factoring can be a good option. Businesses must be careful to set fair discounts for the factor and to formalize the agreement with a contract. Once the process is completed, the business will have the benefit of having enough capital to keep the company running without going into debt or missing a payment.