These days, anyone looking to form a new business relationship — especially one that involves credit — is wise to check out the risk involved first.
Various parties might be checking out your company’s credit rating to determine whether they want to do business with you. That’s why, just as with your personal credit report, you need to be on top of what is in your business credit file.
If your company is in good standing, is free of legal hassles and has a good reputation, your credit file has the power to work for you. A good business credit score can:
- Lead to lower financing costs on loans and credit cards,
- Enable you to qualify for better credit terms from suppliers, and
- Lower your insurance premiums.
Of course, this pendulum swings both ways. Negative information, even if it’s false, can leave your company with higher interest rates, lower credit limits and elevated insurance premiums. You could also lose revenue if customers decide not to take a chance doing business with you.
What Factors Are Included?
Information in a business credit report is gleaned from a wide variety of public and private sources, including:
- The Yellow Pages and other print directories,
- Contracts and loans connected to the federal government;
- People and companies you’ve done business with,
- Corporate financial report,
- Legal filings,
- Mining from Internet sites, and
- The news media.
Credit agencies like Dun and Bradstreet (D&B) are also available to do direct investigation by request.
Does Every Business Have a Score?
No. Many small businesses are judged by the personal credit score of the owner. That often happens when a sole proprietor pays business bills out of a personal checking account. Because business credit reporting agencies gather information from sources like the Yellow Pages, there might be a bare bones record. And any recent legal judgments or pending lawsuits may show up and raise red flags for anyone who inquires about your business.
How Do You Find Out if Your Company Has a Business Credit File?
Pick up the phone, call Dun and Bradstreet or Experian, or another agency that deals in business credit reporting and ask. It’s that simple.
Suppose you find out that your company doesn’t have a credit file. Here’s a checklist from Dun and Bradstreet to help you get started.
Stay on Track
Just as with personal credit, the most important thing is to stay on track by paying bills on time. Beware of overextending your business commitments. Get, and keep, payments into the manageable category. If the problem is cash flow, get it under control by vetting credit customers more thoroughly. Use the same credit reporting agency that others use to check out your business when deciding whether or not to extend credit.
Important Points About Credit and Financing
True or False
Anyone can request and review my business credit report.
True. While personal credit reports are by permission only, commercial credit reports are available to the public upon request. Potential lenders, suppliers, customers, landlords and others can see your business credit file.
Checking your credit report every six months keeps you on top of the information.
False. Dun and Bradstreet, for example, updates its database every day, which can result in up to 1.5 million changes. It only takes one inaccuracy to change the complexion of your credit history. In addition, D&B estimates that one out of every three businesses suffers a decline in its credit score over a three-month period. So at a minimum, check once every quarter.
You might have better luck securing financing if you go to a local bank where they know you.
Probably false.Your bank may have a small town feel, but chances are, the decision to give you a loan likely isn’t made by people at the bank. Most lenders use an automated decision process for loans under $100,000. The system applies certain criteria to loan applications and pops out decisions.
So even if your banker thinks you are a great local business person, his or her opinion may be meaningless. That’s why you need to monitor, monitor, monitor.
Establish Your Credit File
Step 1. Call D&B to request a DUNS number. That is a unique nine digit number assigned by D&B and widely recognized as a means of checking out your business. Companies that want to work with you might ask you for your DUNS number the same way a lender might ask for your Social Security number when you apply for a personal loan. The D&B database includes over 140 million businesses worldwide. By getting the number, your business becomes part of that searchable database.
Step 2. Open a commercial bank account in your business name.
Step 3. Transfer at least a couple business expenses — such as phone and internet bills — into your business name and pay those bills on time out of your commercial account. This generates positive feedback that populates a business credit file.
Step 4. Over time, pay for more and more business expenses out of the commercial account. A good policy might be to transfer a few accounts each month. But be sure you don’t get overextended and end up with black marks on accounts that bear your business name.
Step 5. Update and monitor your credit file regularly. Some credit agencies have a do-it-yourself update system that you can use to keep a close eye on the information that shows up, add data and correct errors. Even if negative information is inaccurate, it can keep others from doing business with you. If you find inaccuracies, call the credit agency and provide correct information. Negative entries that are more than two years old probably won’t show up on your business credit report.
Other than bill-paying records, your business credit file will eventually include information gleaned from public and private records, such as how long you’ve been operating, contact details, parent-subsidiary relationships, affiliations, number of employees, etc.
When checking your record for accuracy, look to see what isn’t there. Your company may have a supplier or vendor with whom you’ve developed an impeccable payment history, but that information doesn’t show up in your credit history. You can call the credit agency and provide them with the data. You can also contact the supplier or vendor, give them your DUNS number and ask them to report your credit. If you’re a good customer, the supplier or vendor will probably honor your request.
Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.