Creditworthiness is a judgment of how likely a business or person is to pay debts fully and on time. Lenders, suppliers and factors all assess it before extending credit.
How it works in factoring
Factoring looks at creditworthiness from two directions:
- The customer (account debtor): this matters most, since the customer's payment is what repays the factor. A seller with a thin credit history can still qualify if its customers are financially sound.
- The seller: the factor still checks the seller for fraud risk, tax liens, litigation, existing liens and its ability to honor recourse and warranty obligations.
Common inputs include:
- Payment history with suppliers, often from business credit bureaus
- Financial statements, cash position and debt levels
- Time in business and industry conditions
- Public records: liens, judgments, bankruptcy filings and tax issues
- For small companies, the owners' personal credit
Factors also learn from direct experience. A customer that consistently pays on time builds credibility; a pattern of late or partial payments may lead to lower credit limits.
Why it matters
For many small businesses, factoring opens financing that a bank would not extend because it relies on the customers' strength. Knowing how your major customers are viewed helps you predict which invoices a factor will fund and on what terms.
What to check
Pull reports on your own business periodically, correct errors with the bureaus, and run credit on new customers before offering them terms.