Did you know that there’s such a thing called a business credit report? I surveyed a handful of my tech entrepreneur friends (obviously a very biased sample), and none of them knew exactly what it was. I know about it from taking a business credit class on Udemy. That class was OK, but recently I got schooled by Levi King, a credit expert and founder/CEO of Nav. There’s some important information I would like to share with fellow entrepreneurs.
What are business credit reports/scores?
Just like personal credit, there are a few big credit bureaus collecting information about business credit. Most notably: Dun & Bradstreet, Experian, and Equifax . Each bureau can have different information on file for the same business, and wind up producing a different score. That’s why you’ve probably noticed your score varies from bureau to bureau. Experian and Equifax are used primarily for business financing purposes, while Dun & Bradstreet is used for non-financing situations. I will explain more in the next section.
It’s worth noting that business credit reports are more error-prone because the credit file is pulled by matching the business name and business location in a credit database. Your business can get mixed up with another business with a similar name in the same area. On the contrary, a personal credit report is a lot less error prone because the credit file is pulled based on matching 3 out of 4 attributes: personal name, social security number, date of birth, and location. It can be beneficial to monitor your business credit report to avoid having it get mixed up with other businesses. Having a bad business credit score can negatively impact the type of business credit card terms you can get.
In addition, your business isn’t protected by the FCRA. What this means is: (a) anyone can pull your business credit report for any reason, and they don’t require your permission, (b) your business credit report could be adversely affecting your business and lenders/suppliers/customers don’t have to tell you!!!!! On the plus side, you can check any business’s credit, including your competitors, your suppliers, and your customers.
How are business credit reports/scores used?
Business credit reports are not just used for obtaining business financing. Even if you think your business will never get outside financing, business credit scores can still impact your business. There are primarily 3 ways your business credit information is being used:
- Financing: Your (bank) lenders will use the business credit scores as a disqualifier of your loan request. If you are applying for an SBA loan, you are required to have a minimum FICO SBSS score of 140 (out of 300), which is calculated based on both personal and business credit information. Lenders don’t just look at the scores though. In fact, some lenders ignore the scores and only pay attention to the content of the business credit reports such as presence of extreme payment delinquencies, collections, or public records like UCC filings, tax liens, bankruptcies, judgements, et cetera. Many self-interested companies oversell the value of the credit scores in financing scenarios but what matters most for lenders is really the content.
- Trade Credit: If your business credit scores are high, your suppliers and vendors will give you favorable terms to purchase on credit. For example, if you are a contractor with high business credit scores, Home Depot might give you a credit line of $10K and the payment won’t be due until 45 days after the purchase. On the contrary, if your business credit score is low, your supplier might require you to pay cash on delivery or ask you to personally guarantee the business purchases. Dun and Bradstreet’s Paydex score is widely used for this purpose. It’s a score between 0 – 100. A Paydex of 80 or higher is considered healthy for a company — it represents a company that is paying its suppliers and vendors on time.
- Big Customer Due Diligence: If you want to do business with local/state/federal governments or Fortune 500 companies, chances are they will check your business credit and require you to have a minimum business credit score. For example, if you are a supplier for Walmart, they require you to have a minimum Paydex score of 80. If, for some reason, your Paydex score drops below that, they will notify you and ask you to improve. If the score is not improved within a period of time, they will most likely drop you as a supplier. Governments and big corporations do this to make sure their suppliers/vendors are reliable and pay their bills on time to subcontractors and creditors. In other words, having a high business credit score is usually a requirement to win contracts from big organizations.
This article was originally written on September 10, 2014 and updated on January 30, 2020.
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