Just like a consumer with a mortgage or a wallet full of plastic, companies that borrow money have their own credit history. And that history matters. A company's track record with credit—spelled out in detail on a credit report— can have a huge impact on its ability to borrow more money. Just as important, a company's credit history sends a strong message to potential partners and suppliers. A good credit report suggests that a company will likely meet its obligations and pay its debts in a timely manner—the type of company that others want to do business with.
How A Credit Check Can Help Your Business
Business credit bureaus calculate a score based on your history of repaying your debts. There are a number of perks that come with a high score:
more favorable financing terms
better lease arrangements
the possibility of bigger loans or credit limits to fund your business's growth
A good score also boosts your company's image and credibility in the business community. In business, few things are more valuable than your reputation.
Doing Your Due Diligence
A business credit report helps potential partners determine the financial risk of doing business with your company. Among other things, it addresses the big questions:"Can your business pay its bills on time? Can it pay off its debt? Can it pay suppliers by the agreed-upon deadlines? Are there looming regulatory or legal threats to your business's operation?" Since more than 85 U.S. companies filed for commercial bankruptcy each business day in 2018, small wonder that lenders and potential partners look to your business credit report for assurance that you can stay afloat. Do your due diligence and pull the credit reports.
Business Credit vs Personal Credit
How are business credit and credit scores different from personal credit and credit scores (such as a personal credit card and credit report)? Let's take a look.
Businesses have more credit capacity.
In fact, businesses have 10 to 100 times greater credit capacity compared to personal credit, according to the Small Business Administration. A good business credit score means a business owner can rely less on his or her assets and more on business loans and credit to fund the company.
Business credit bureaus are not synched
While the three consumer credit bureaus use the same kind of data to assign credit scores to individual consumers, the three business credit bureaus each depend on their own data and scoring systems.
Business credit reports are available to the (paying) public
Personal credit reports are private—another layperson couldn't just gain access to your personal credit report. When it comes to business credit, however, your report isn't private. Anyone willing to pay for it can see your company's information.
A business credit report involves data associated with your company, such as:
- Company size, address and other demographic information
- Its tax identification number and other regulatory data
- Its business credit score, which is typically graded on a scale of 0 to 100
- Its credit utilization ratio and total available credit
- Its payment history, balances outstanding and missed or delinquent payments
- Its loans in collection
- Trade data
- SIC code and UCC filings
- Bankruptcies, IRS tax liens and other legal judgments
- Derogatory information
The Three Major Business Credit Bureaus
Dun & Bradstreet (D & B)
Unlike Experian and Equifax, which also offer personal credit reports, D&B focuses exclusively on business credit and its PAYDEX 100-point score system assigns an 80 or higher rating to companies with excellent financial health—which means they pay lenders and suppliers earlier than payment is due. To establish a PAYDEX account, you'll need to:
- Obtain a DUNS number from Dun & Bradstreet
- Register your business with Dun & Bradstreet
- Open at least four trade accounts, the minimum number D&B requires for a PAYDEX score
PAYDEX scoring is exclusive to D&B.
Equifax has three types of scores to offer a business. The Equifax payment index, also measured on a scale 1 to 100, calibrates your business's reliability by looking at your history of on-time payments (but not early payments). Equifax also offers a business failure score (scores between 1,000 and 1,080) that — you guessed it — estimates how likely your business is to fail. Its credit risk score (101-992) judges how likely your business is to become late on payments in the future.
Experian also provides a credit score 1 through 100 for businesses, but looks at more than your payment history for its estimation. It also factors in information based on a series of questions about your business, including how much credit you've used and applied for recently.
According to a Wall Street Journal study, just one-third of small business owners checked their business credit report during their previous two years of operation. Of the firm owners who checked their reports, nearly one quarter said they found errors or missing data that put their business in a riskier (and more expensive) category.
This underscores the importance of an accurate business credit report. You can contact a reporting agency to fix errors—each credit bureau has its own process for doing so.. (This information can be found online on a reporting agency's website.)
Be prepared to send any supporting documentation that validates your claims. For a fee, you can also subscribe to monitoring services that alert you to changes in your business credit report.
Get Rewarded for Paying On Time
When it comes to business credit reporting, any information submitted from outside parties is voluntary. That means if a vendor does not report your (good) transactions to the credit bureaus, you don't get the benefit of a potentially higher score.
For this reason, look for lenders and suppliers that will report your timely payments. Some don't, so choose vendors who routinely send such information to credit bureaus. Being able to take credit for your responsibility will help to build your business credit profile and increase your credit score. Equifax's payment index and D&B's PAYDEX score rely on on-time payments.
Low-Cost and Free Credit Checks for Your Business
Personal credit reports are easy to access for free: not so business credit reports. Typically, businesses pay for access to their credit report.
A free business credit report may be accessible, however, under these circumstances:
You apply for business credit from a lender
The lender contacts a business credit bureau and finds your credit rating insufficient
You receive notification that your credit application has been denied by the lender
You reach out to the specific credit bureau whom the lender contacted to determine your eligibility for credit and request access to your credit report.
The credit bureau in question provides a one-time, free credit report for your business.
What Paid Credit Checks Do for You
Of course, it's best to have regular access to your credit report. For that, you'll need to pay — and with business credit reports, you get what you pay for. For example, D&B offers reports for $12.99 each, but these don't come with a credit or PAYDEX score. Here's a breakdown of the cost of a report (with your business credit score), per credit bureau:
Having to pay for regular credit reports is not fun. But here's the silver lining: D&B offers free credit monitoring at CreditSignal, so that when your score changes for the better (or the worse) you will receive notification and can 1) anticipate a lender's reaction to a request for more credit and 2) choose when to request a copy of your credit report based on real data.
To do a credit check on your business, follow these steps.
Obtain an employee identification number (EIN) from the IRS.
Register your business with any of the major credit bureaus. Submit your financial statements, registration number, supporting documents and other required information. The credit bureau will contact your creditors to receive updated information.
Request (and pay for) your credit report from one of the major bureaus.
Review your report for any inaccuracies or incomplete information.
Should You Use Credit or Take Out a Loan?
This depends on your business needs. When you take out a business loan, you receive a one-time lump sum of money for a specific purpose. You'll pay this off on a monthly bas while accruing interest, much like you do with a car or a house. A business credit card, on the other hand, can be used now or into the future. Like a personal credit card, you can use it for a variety of purposes; it can be paid down and billed back up again as needed. You can also take out a business line of credit, which you can also use and pay off as needed. (And in case you were wondering, business debt doesn't reflect on your personal credit score.)
Michael Aning, Branch Manager of Mosaic Mortgage in California, is a small business owner and mortgage broker who also deals with commercial leases and loans. For very small businesses, such as sole proprietorships, he suggests a business owner either use a business credit card or take out a personal line of credit.
"[A] credit card is easier to use point-of-sale [than a loan] if you're going to buy something, but your debit card tied to your checking account could do the same thing. The only difference is convenience," says Aning. He suggests that unless you need a chunk of change up front, you're better off getting a line of credit or using a credit card instead of a loan: That way you pay less interest over time. However, if you do need significant funds up front, then a loan is the way to go.