Businesses, no matter their size, need at least some commercial insurance. Lawsuits loom around every corner for today's entrepreneur, which makes business insurance even more important. Sure, customers and employees provide the life blood for businesses, but they also can become potential plaintiffs in legal action that can break a commercial venture.
The question, then, changes from "Do I need business insurance?" to "How much is this going to cost me?" That depends on a variety of factors – most of which relate to the amount of risk surrounding your company and its line of business. And it also depends on your business credit profile.
Yes, insurance providers evaluate a company's credit as part of the quote process – but probably not in the way you might think.
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How providers use your credit profile
If you think providers study your credit profile to determine whether you can afford coverage, you're completely off base. Instead, many business insurance carriers use information in your credit report to evaluate your risk of filing a claim. (They do the same in most states when selling homeowners and auto insurance.)
What's credit have to do with risk? Insurance companies believe – and they say studies back their belief – that policyholders with poor credit have a much higher risk of filing claims and that those with good credit carry a much lower risk. Providers want to insure lower-risk clients so they offer them lower premiums. Conversely, businesses with a poor credit profile pay more for coverage.
What factors do providers look at? In general, carriers check for patterns relating to your bill payments – particularly if there's a habit of being late with them, any collections activity and outstanding loans, if applicable. They'll also consider how many credit cards the business has and the duration of its credit history.
It is important to remember that providers don't evaluate credit factors uniformly, meaning premiums vary across the industry. That's one of the reasons it's important to shop coverage with several carriers.
Is it fair for carriers to use credit reports?
The use of credit scoring as a factor in setting premiums is controversial, especially for home and auto insurance policyholders. Detractors say it unfairly affects poor and minority policyholders.
But the industry disputes that; the Property Casualty Insurers Association of America could be the most accurate predictor of a policyholder's risk. The organization maintains that using credit usually benefits most policyholders.
How you can improve your company's credit profile
Whether you buy into the industry's assertions about the use of credit or not, it's important to make sure your company's profile presents a favorable view to win the lowest possible premiums.
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Here are some ways to make sure your company's profile is business-insurance friendly:
- Make sure it has a credit profile. Many entrepreneurs use their personal credit to get their new company off the ground. But it's important to set up a bank account under the business name and pay any company-related bills through it. This can help establish a credit history.
- Pay the business' bills on time. Common sense, yes, but it’s also essential for maintaining a healthy credit score. Just as being late will hurt your personal credit report, it's also a negative when it comes to a company's profile.
- Keep up with vendors and customers. Why? Because customers who can't pay bills or who constantly pay them late can present a cash-flow problem for your company. Several private services can provide information about a company's finances.
- Check your business credit profile. Get a copy of your company's report at least once a year to review its accuracy – and to give you an idea of where you stand. Correct any problems you find right away – it can take time.
Owning and properly insuring a business is tough enough. Don’t add on to it by paying too much for coverage simply because you've neglected the company's credit profile. Understanding what goes into process can help you hold onto your hard-earned cash.