Understanding Business Credit Reports -
A Complete Guide to Business Credit Reports
Just like you, your business and all the other registered businesses have a credit score that is forged through a business credit report. While there are a handful of options available on the market such as Experian, Nav, Equifax, and Dun & Bradstreet, many of them provide the same feedback. Companies small and large turn to credit reporting agencies to obtain a credit score of their business or that of a competitor, partner, or potential customer. Agencies like the ones mentioned above gather public and private information to create an extremely detailed and thorough credit profile comprising of businesses across all industries.
Why is a Business Credit Report Important?
As a business owner, you will find yourself partnering with third parties to achieve a business goal where these initiatives are bolstered by aid from lenders, suppliers, or both. However, before a supplier or lender agrees to work in concert with your business, they will almost always check a business credit report when determining if your business is a suitable fit.
Furthermore, a displeasing or below-average credit report can prevent businesses from receiving a line of credit or from obtaining material from a manufacturer. In this dynamic where resources and capital are being exchanged, vendors and lenders leverage credit reports to draw conclusions on how reliable potential business partners are.
Who Uses Business Credit Reports? A Deeper Look
In addition to the businesses that file to receive a report, there are other entities that also benefit from business credit reports:
Lenders– Lenders use credit reports to evaluate new credit applicants and determine how much credit is appropriate to extend. Lenders will also use these reports to monitor existing debtors and examine matters more closely such as last payments made, existing balance still owed, and more.
Suppliers – Suppliers leverage business credit reports to make decisions about extending businesses materials and goods. Suppliers want to see and verify that a business is able to make timely payments towards the goods/materials they received.
Potential customers – Potential customers utilize business credit reports to gain insight into the credibility of a business. This is often used in the Government Contracting space when a request for proposal (RFP) is up for discussion.
Business owners – As mentioned above, business owners utilize these reports to monitor financial stability and to understand the fitness of their business from an objective lens.
General Sections of a Business Credit Report
If your business is considering filing for a business credit report, there are four sections of the credit report you should expect to receive and review:
Company Profile – The company profile is indicative of what it sounds like: an overview of your business that includes information such as address, incorporation information, industry classification, and ownership.
Financial Stability Risk Assessment – In this section, businesses can find comprehensive data for evaluating risk and making critical business decisions. The intelligence includes:
Trade Payments – The trade payments section provides insight to credit professionals by displaying payment behavior of how a business has made payment to third parties in the past.
Public Filings – In this portion of the report, business credit reporting agencies set forth all business-related bankruptcy information from every bankruptcy court in the United States, revealing lawsuits, liens, judgments, and more.
What Causes a Low Business Credit Score?
When reviewing and analyzing your business’s credit report for the first time, you may find yourself overwhelmed by the volume of information. To make things very simple for you and your business, there are two common factors that generally cause your business to have an unsatisfactory credit score:
- Slow payments: Everyone makes mistakes, but if your business has many slow payments relative to the overall number or value of recent payments, late payments can have a large detrimental effect on your credit report.
Note: Transactions listed on business credit reports are dollar-weighted, so higher-value transactions affect your report more than lower-value ones, but small payments can still have a negative impact on your scores substantially.
- UCC Filings: UCC Filings usually establish that a bank or other party has a secured claim to a business’s assets as collateral in the event of default. These are normal occurrences for most businesses and not necessarily bad, but they decrease your overall portfolio score and may cause lenders to think your business is over-leveraged.
How to Improve Your Credit Score
Upon receiving your business’s completed credit report and understanding its findings, you may be displeased with the results whatever they may be. However, there are some things you can do to improve your score:
- The best way to improve your business credit report is to find erroneous slow payments or closed UCC filings and dispute them.
- Check your business credit report on a regular basis to confirm that information is updated and accurate.
- Credit reporting agencies make mistakes too, and UCC filings and slow payments often stay on your report when they really should not.
- Pay your creditors and suppliers on time.
- Contact the party that reported the slow payment or made the UCC filing. Make sure you have met your obligations to them (or perhaps that they mistakenly reported you to a credit reporting agency). Make sure that if you dispute the slow payment, they won’t re-report your business. Make sure that if the company once had a UCC filing against your firm, it’s now closed.
Information to Review with Your Accountant
Now that you are aware of the basics of a credit report, you should consult with your company’s accountant for them to provide professional direction and guidance for your business. When meeting with your accountant, reviewing the following material will be of great significance as leaving this information idle may be detrimental for your overall credit portfolio and business:
Company profile and ownership:
-Stock ownership and percentages
-Names of stock owners
-If there is a holding company / if the business is a subsidiary of another company
-Accuracy of financial statements (current and up to date)
–UCC filings allow creditors to notify other creditors about a debtor’s assets used as collateral for a secured transaction
-Request updated information if the current filing is incorrect
Accounts payable / trade payments
-What you owe your vendors
-Payment history (non-payments, etc.)
-The following can have your business appear as a high risk to creditors:
- Debarments ( The Federal Government will exclude your business from bidding contractors)
Regardless of where your business is in its lifecycle, a business credit report is something that all businesses should have and draw insight from. We urge the decision-makers of your company to consult with an accountant to better understand the findings of a credit report and to provide guidance on next steps.
If you found this article useful to any degree or would like assistance understanding your business’s credit report, please get in contact with a member of our Finance team.
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About Tessa Lucero-Bennett
Senior Manager, CPA & MBA
Tessa is a Senior Manager at Ryan and Wetmore. Tessa has over 20 years of experience serving and advising businesses in all phases of the organizational life cycle. Her experiences range from traditional accounting and tax services to complex consulting services, including business planning, financial budgets and projections, benchmarking and financial trends, M&A support and analytics, internal controls assessment, development of best business practices, and financial training for top management levels.
About Jack Ramsey
Jack Ramsey is a Finance Consultant at Ryan and Wetmore. He focuses on government contractor services as well as research and analysis of the economic, tax, and regulatory environment. Jack graduated from American University with a Bachelor of Science in Economics.