Small Business Corner

Business credit is pretty much like personal credit, but for businesses. If you understand how your personal credit reports and scores work, you’ll have a good idea of how business credit works too. But there are some important differences.

What is Business Credit?

A business credit report is a record of your company’s history managing credit such as loans, lines of credit, credit cards, and vendor accounts. Your business credit reports may also contain other information like the year your company was established and your business registration details.

You may have a business credit file without knowing it. Or you may not yet have a business credit file, even if you’ve had an established business for some time.

A business credit report includes detailed information, such as:

• Business profile (company name, address, owner(s), number of employees, etc.)
• Financial information (annual sales, financial statements, etc.)
• Historical business data (date established, etc.)
• Business registration information
• Trade lines
• Credit accounts
• Payment history and collections (if applicable)
• Overall credit utilization
• Public records (bankruptcies, liens, judgements, Uniform Commercial Code (UCC) filings, etc.)
• Business credit scores and risk factors that estimate the probability of late payments and business failure

Not all business activity is reported on business credit reports. Only some lenders and suppliers will report credit lines and trade lines to the business credit bureaus, where they will be added to a company’s commercial credit reports.

If a lender or vendor doesn’t report to the business credit bureaus, the account won’t help you establish business credit. However, you can request that vendors you work with begin reporting data to the bureaus, if they aren’t already.

You can check if your business already has a credit file with any of the major business credit bureaus. Or you can check the credit reports of any other business you want to review. As a small business owner it’s important to know where you stand.

Business credit is not covered under the Fair Credit Reporting Act (FCRA). As a result, business credit reports are not private. Anyone can view any business credit report, although there’s often a charge for this information.

Business Credit Bureaus

There are three major business credit bureaus:

• Equifax Business
• Experian Business
• Dun & Bradstreet (D&B)

Each of these companies collects data and produces its own credit reports. They also provide their own credit scores based on those reports.

Small Business Financial Exchange (SBFE) is another name you’ll often hear associated with these companies. SBFE is not a business credit bureau, but it does pass along data from lenders to four different business credit reporting agencies:

• Equifax Business
• Experian Business
• Dun & Bradstreet
• LexisNexis Risk Solutions (not a credit bureau, but collects and reports business credit activity)

If a lender reports data to SBFE, you can usually expect that data to end up on the reports of the commercial credit reporting agencies listed above. 

What Are Business Credit Scores?

Business credit scores are based on information from business credit reports. Each of the business credit bureaus will typically offer credit scores along with the reports they provide, depending on the product you buy.

You may see several different types of credit scores on a business credit report, including:

• Dun & Bradstreet PAYDEX or Equifax Payment Index: On a scale of 1–100; Indicates how promptly a business has paid its recent bills. Late payments will lower this score. Paying early might score you some bonus points.
• Business Creditworthiness, Credit Risk Score, or Delinquency Predictor Score: Scale varies by credit bureau; A bit like a personal credit score, it provides an estimate of the likelihood that the business will become severely delinquent on payments in the next 12 months.
• Business Failure or Financial Stability Score: Scale varies by credit bureau; Estimates how likely a business is to fail or experience severe financial distress in the next 12 months.

The simplest (i.e., least expensive) credit reports may only include one credit score, like a payment index. More complex (and expensive) reports will usually include more scores.

Each of the credit bureaus has its own scoring systems, using different algorithms and presentation styles. Dun & Bradstreet may give your business creditworthiness on a scale of 101 to 670, while Equifax may present the same kind of data in a range of 1 to 5 risk classes. Regardless, the scores you see will generally fall into the three categories above.

Business scores factor in a wide variety of data types to provide simple numbers that lenders and other companies can use to evaluate the risk of doing business with your company. These scores may consider information such as:

• Payment history
• Credit utilization and outstanding balances
• Trade lines, past and present
• Credit accounts, past and present
• Average age of accounts
• Net worth
• Business age
• Business type and industry risk
• Number of employees
• Public records like collections, bankruptcies, liens, and UCC filings
• Demographic data, including Standard Industrial Classification (SIC) codes
• Trends over time

At a Glance: How to Build Business Credit

If you don’t yet have a credit file established, that’s OK — it’s a pretty simple process.

Not all businesses have a credit history, just like not all people have a credit history. If a business hasn’t been around very long, isn’t listed in directories, or hasn’t established any trade lines like business credit cards, business loans, or vendor accounts, there might not be any information to show in a commercial report.

There are two basic stages on the path to business credit:

1. Establishing credit files at the business credit bureaus
2. Building business credit by including trade lines and credit accounts in those files

If you’ve had a business for some time, you might already have credit files with the commercial credit bureaus. It’s easy to check to see if a report exists for your business (or any other business), although you’ll likely need to pay to see any details or credit scores.

Building strong business credit can take some time and dedication. But the general steps are pretty easy, as long as you understand what you’re doing.

• Understand the basics of business credit
• Establish and register your business
• Get business credit cards and open trade lines with vendors
• Pay your bills on time and don’t max out your credit cards
• Monitor your business credit reports to see your progress and check for errors

Learn more about USSFCU's Business Visa credit card for your business.

© 2020 Credit Card Insider View original article here.