A strong business credit profile is the foundation for demonstrating your business’ creditworthiness to a potential lender. It’s one of the first places lenders look to learn the details of your business—the industry you do business in, projected revenues, estimated annual sales, and how you interact with your creditors is some of the information included in your business credit profile.
Any information within your profile perceived as a negative by a potential lender could make it more difficult to qualify for a small business loan. Fortunately, once you are aware of how your business credit profile is created, and the type of information it includes about your business, you can start taking action today that will positively impact your business credit profile in the future. Although a strong business credit profile is not a guarantee your business will qualify for a loan or even a guarantee of better rates, a good profile will increase the number of loan options available.
Your business credit profile should not be confused with your personal credit score. Your personal credit score doesn’t address your business’ credit practices, but rather reflects how you meet your personal obligations. Nevertheless, most lenders will consider your personal credit score in addition to your business’ credit profile so it’s important to take actions that will build and maintain a good personal credit score in addition to building a strong business credit profile.
Additionally, some of the business credit bureaus also report on personal credit, but the information they collect is different and focused on your business credit obligations. There are several business credit reporting bureaus, but the three largest are Dun & Bradstreet, Experian, and Equifax. In addition to monitoring business credit use, they offer additional credit services to small businesses that include credit risk management, the ability for your business to check the credit of potential of your customers, and industry-specific data to help you identify potentially risky customers.
The business credit bureaus will sometimes reach out to small businesses that offer credit to their customers to inquire as to whether or not they are interested in reporting the credit behavior of their clients. As a general rule, I think this is a good practice. The relationship also increases the amount of information available to you before you offer payment terms to a new customer.
How Do the Three Primary Business Credit Bureaus Differ?
All three bureaus use data regarding your business available on the public record. This could include how long your business has been in existence, whether there are any liens or judgments against your business, the industry your in, and if you have any current small business loans.
All the bureaus will report on the status of any current or previous small business debt, but there are subtle differences between the big three:
The Small Business Finance Exchange (SBFE) is made up of credit data collected by the largest small business lenders in the United States. Equifax takes that data and creates a report that reflects how small business owners make credit card and other loan payments. Because the data is a direct reflection of how small businesses interact with traditional small business lenders, many banks use this report to evaluate a business’ creditworthiness.
They also collect trade credit information and data from the public record to evaluate small businesses, but their report is heavily weighted to how a business interacts with banks and other traditional lenders like credit card providers. The Equifax data processes millions of records every day; and with few exceptions is updated on a monthly basis to ensure accuracy.
Dun & Bradstreet (D&B)
D&B is the only bureau of the three that reports exclusively on business credit. They are also the oldest of the three and weight their profile reports on how businesses interact with their vendors and suppliers. In fact, many potential suppliers will look at your D&B report before they offer your business credit terms; making it critically important to make sure your business’ D&B profile is accurate.
The 100-point PAYDEX® is probably the best known of D&B’s reports, but it’s only one of five reports they produce. They look at business-to-business data submitted by suppliers, historical payment history, public records, and industry data to create what they call, “a more complete” business profile.
D&B provides three “predictive” scores along with two “performance-based” scores. The three predictive scores are designed to forecast how a business will perform over the next 12 months:
- The Delinquency Predictor Score: This score predicts the likelihood that a business will meet their credit obligations in a timely manner.
- The Financial Stress Score: This score predicts the likelihood a business will experience financial distress during the next 12 months.
- The Supplier Evaluation Risk Rating: This rating predicts whether or not a business might stop delivering goods or services.
D&B predictive scores look into the future by evaluating past performance, industry data, trade references, and the company information on your profile. It’s important to make sure your business profile is correct because it’s not uncommon for something as simple as your industry classification to be incorrect, which might assign your business to a higher risk category—making it more difficult for your business to qualify for a small business loan.
The D&B performance-based scores represent a business’ past performance over the last 24 months:
- The PAYDEX Score: The 100-point PAYDEX score is what many small business owners think of when they think of Dun & Bradstreet. The higher your score the better. This score is a reflection of your payment history with vendors that report to D&B. If you have good relationships with your suppliers and keep your account balances current, but they don’t report your good credit behavior, that information won’t be included when calculating your PAYDEX score. You should encourage your current suppliers to report your credit history to D&B and make it a point to ask any new potential vendors and suppliers to confirm that they do.
- The D&B Rating: This rating is based upon company financial statements and other public information to indicate a company’s net worth and financial health. If there is no information available, D&B will rely on potentially inaccurate public data and make assumptions with information like industry size and classification, so something as simple as submitting an accurate and up-to-date financial statement has the potential to improve this score.
Like Equifax and D&B, they also collect information available within the public record, information reported by both lenders and suppliers, as well as information from credit card companies, collection agencies, and other databases.
Similar to D&B, Experian captures information about your business’ background, company financial information, credit score and risk factors, banking, trade, and collection history, liens judgments, bankruptcies, and your industry to create a 100-point ranking for your business (but the data is weighted and scored differently than the PAYDEX score).
They look at this data to rank the risk of offering credit to a business:
Does Information Stay on My Business’ Credit Report Indefinitely?
The short answer is no. Experian is a good example. It’s pretty standard and a good rule of thumb, but the three bureaus don’t treat the data exactly the same:
|Trade Data:||36 months|
|Bankruptcy:||9 years, 9 months|
|Judgments:||6 years, 9 months|
|Tax Liens:||6 years, 9 months|
|UCC Filings:||5 years|
|Collections:||6 years, 9 months|
|Bank, Government, Leasing Data:||36 months|
It’s not uncommon to find mistakes on your business credit profile (just like your personal credit report). And, the Fair Credit Reporting Act (FCRA) doesn’t apply to how business credit is reported, so it’s not quite as easy to fix mistakes. Fortunately, the major credit bureaus all want to make sure the data they report is accurate, so they’re motivated to fix mistakes and they all offer a formal dispute process. It might take a little longer to correct errors in your profile, but any verifiable error can be resolved.
5 Ways to Improve Your Profile
Taking the right action today can help you build or improve your business credit profile. Although there is no shortcut and there isn’t anything a business owner can do to improve their profile over night, these actions will make it possible to improve your profile in a relatively short period of time:
Regularly monitor your profile: This might sound like an overly simplistic recommendation, but it’s human nature to take action on those things to which we pay attention. In an interview with Nav co-founder and CEO, Levi King, he suggested the link to monitoring your credit profile and positive results was measured by their American Dream Gap Report: “[B]usinesses that regularly monitor their credit were 41 percent more likely to be approved when applying for a small business loan.”
What’s more, it’s not uncommon for there to be mistakes within your profile, so regularly monitoring your credit data to ensure it’s accurate is an important strategy for maintaining a strong business credit profile.
Separate business and personal credit use: It’s not uncommon for small business owners to use personal credit to pay for business expenses—particularly in very young businesses. There may be times when this is expedient, but it’s considered best practice to avoid using personal credit to pay for business expenses as much as possible.
Using your personal credit doesn’t do anything to help you build a strong business credit profile; and the higher balances (increasing the ratio of available credit to the credit used) may even hurt your personal score. This could be true even if you pay the balances off with every credit card statement.
Look for ways to establish business credit accounts: A business credit card is a relatively easy-to-qualify-for business credit account that may be a good replacement for using a personal credit card for business use. There are also suppliers like Staples, Home Depot, and others that offer credit to small business owners and can be another option to establish credit accounts to help build or strengthen your business credit profile.
These businesses all offer supplies that most businesses use on a regular basis and report your good credit behavior to the business credit bureaus, which will help you build a strong profile over time.
Establish trade accounts with your vendors: Many of the vendors you regularly use to purchase materials or services for your business offer 30- or 60-day terms to their best customers. If they report your credit history to the credit bureaus, it will help you build, maintain, or improve your business credit profile. Whether or not they report, is important enough that you should ask every vendor if they do, and if they don’t, encourage them to do so.
Use the credit you need and make payments according to agreed-upon terms: There are always costs associated with borrowing capital, so borrowing more than is needed may not be a sound strategy. That being said, borrowing the capital you need to fuel growth or otherwise add value to your business and making each and every payment in a timely manner, is the single most important thing you can do to build a strong business credit profile.
“Building a strong business credit profile is a matter of making sure there is more good stuff than negative stuff in your profile and won’t happen overnight,” said King. “If you have a weak business profile, start by resolving the negative things and give it time.”
“Getting positive credit behavior on your report will make a big difference. Think in terms of 15 positive accounts for every 5 negative accounts. Negatives will stay on your report for a period of time, but adding positive credit accounts will move you up because of the ratio of good to bad.”
The need to maintain a good personal credit score will likely never go away for a small business owner, but a strong business credit profile is a critical foundation to how a lender measures your business’ creditworthiness. What’s more, when looking for small business financing, it’s a good practice to make sure any potential lender reports your credit behavior to the appropriate business credit reporting bureaus—because some financing options do not.