Understanding Business Credit
As an entrepreneur you aim to create independence between your business’ capacity to borrow, and yours personally. But how do you build business credit? Who are the bureaus that monitor it? What factors affect the business credit? Who uses those business credit reports? And once you have it, won’t you need to use your personal credit for your business? Let’s unpack…
How business credit helps your company
A strong business credit indicating that your company represents a low risk, increases your company’s borrowing power, its ability to get better payment terms from your vendors, save on insurance, obtain contracts and certain small business loans with better terms. On the contrary, if the company is perceived as a high risk, banks are less willing to lend and vendors will offer you stricter payment terms or charge you higher premiums.
What information is used to determine the business credit worthiness
The business credit reports on the payment history of a business. There are two kinds of accounts (or tradelines), the financial tradelines which refer to the loans that banks and other lenders extend to the business, for example a business term loan or a company credit card.
Vendor tradelines refer to the credit that a supplier or vendor offers to its business client by agreeing to be paid later, usually 30, 60 or even 90 days after rendering the products or services. For example, an office supply vendor gives a client payment terms of net 30 days to pay the invoice for the supplies rendered today. Vendor tradelines can also be known as merchant tradeline, supplier tradeline, vendor tradeline, vendor credit, trade credit or vendor account.
Suppliers and vendors typically look at the business’ payment history on similar types of vendor tradelines, while lenders tend to place more emphasis on the financial tradelines. Some bureaus specialize in financial tradelines, others focus on vendor tradelines, and some collect data on both.
To generate the credit reports, the business credit bureaus (also known as credit agencies) collect additional information about the business like time in business, number of employees, location or industry. The information is obtained from several sources including lenders, suppliers, public records (incorporation, UCC filings, courthouses, etc), corporate financial reports, government contracts, grants, or loans, business public information (online, directories, media) and in some cases, self-reported information. Some business credit bureaus include information about the company’s principals (owners or individuals that control the company) in the credit file for the business as well.
Business credit bureaus
There are many companies that produce business credit reports, including companies like Creditsafe, LexisNexis Risk Solutions and specialty credit agencies, but we’ll discuss the most commonly used bureaus including Dun & Bradstreet (also known as D&B), Experian Business, Equifax Small Business, Paynet and FICO.
Dun & Bradstreet
The oldest of all bureaus, sells different types of credit reports but the best known is the D&B PAYDEX Score, which ranges from 1 - 100, where the higher the score, the better. This bureau tracks primarily vendor tradelines, so the reports are most often used by companies that offer trade credit.
To have a D&B credit report, the company must register first to obtain a DUNS number (you can get it for free here or by calling 1(844) 241-6860).
This business credit bureau does not consider any self-reported information by the business. Their most well known score is the Experian Intelliscore PlusSM which has a score range of 0-100, where the higher the score, the better. Experian Business has a new version, the Experian Intelliscore Plus V3, with a score range of 300-850.
Equifax Small Business
This business bureau offers different scores with varied ranges but the two most important scores are Equifax Business Credit Risk Score™, which ranges from 101 – 992, where the lower it is, the better. This score anticipates the likelihood that the company incurs in a 90-day delinquency or charge off over the next twelve months.
The other commonly used score is the Equifax Business Failure Score™, which ranges from 1000 – 1610. where the lower the score, the better. This score anticipates the likelihood that the company fails through bankruptcy within the next twelve months.
This bureau focuses on financial tradelines and offers the PayNet MasterScore, which is used primarily for lending and leasing decisions. This score ranges from 500 to 800, where the higher the score, the better.
FICO Small Business Scoring Service Score (FICO SBSS Score)
Besides being widely used in consumer credit scoring, FICO also provides a business credit score called the FICO SBSS Score (used by the Small Business Administration (SBA)
for the SBA 7(a) loan applications). This score combines credit information from both the business and its principals. The score indicates the likelihood of the business to make the payments on time, within a range from 0 to 300, where the higher the score, the stronger the chances the company will pay on time.
Factors that affect the business credit
While there are five primary factors that affect personal credit (credit utilization, length of credit history, payment history, new credit, and credit mix), business credit is affected primarily by one factor: Payment history. The payment patterns of consistently paying on time or late directly affect the business credit. Some credit bureaus also take into consideration the debt utilization of the business. If that’s the case and your credit reports show you’re using a high percentage of your available credit, your business credit scores might suffer.
Having collections, any company or personal liens and judgments or bankruptcies also affect the business credit score negatively.
How to Obtain your Business Credit Reports
The business credit bureaus create and sell their reports to lenders, vendors or insurance providers, who use the reports to assess the risk of doing business with a company. Anyone can purchase a business credit report, the business owner, competitors or prospective clients. And unlike personal credit reports, which can be obtained for free every 12 months, business credit reports must be purchased, even by you, the owner.
How to build business credit
First step is to establish business accounts of both types, vendor and financial tradelines. For vendor tradelines you may check with your suppliers if they report to the bureaus. Office supplies companies often do. For financial tradelines, consider opening a business credit card, since most are reported to at least one of the major business credit bureaus.
Once opened, manage your accounts. This includes paying all the bills on time, monitoring the business credit reports to ensure their accuracy and reflection of all new accounts opened. Lastly, keep your debt balance in check, since it can impact some of the credit scores that take credit utilization into account.