Maintaining a good credit rating for your business is always important – but even more so in times when credit becomes tighter and more difficult to obtain on affordable terms. For small business owners seeking financing of almost any kind, a clean credit report goes a long way toward hearing “yes.”
Banks and other lenders are relying more and more on credit scores produced by major credit reporting agencies when making loan decisions. The reason is simple: It lowers their risk.
Having good business credit (in addition to personal credit) can save you money. Lenders and vendors extend better terms to good credit risks and are less likely to demand personal guarantees.
For many business owners, however, and especially startups, credit reports and ratings are alien territory. How do credit reports “happen” anyhow? Does your business even have one? If so, what’s in it and what can you do to assure it’s accurate?
Here’s a short-course in business credit ratings and reports:
What are they? A credit report on your business shows how you manage your financial obligations. Banks, credit card companies, utilities, phone companies and thousands of other business service providers report information on your business to the major credit reporting firms: D&B, Experian, Equifax and TransUnion. The credit reporting firms compile the data into standardized reports and create scores.
Do you have one? If you’re not sure, just check. You can search in the business sections of the credit reporting company websites. Generally, it’s free to simply find out if your business is in the database. But you may have to pay for a copy of a detailed report.
What’s in it? Financial information, such as major suppliers you deal with, outstanding balances, credit lines or business loans, your payment habits and trends (have you’re payments become slow lately, for example). Credit reports may also compare your payment performance with industry standards, and include “public record” information such as liens, judgments or bankruptcies. Basic demographic data will be there, such as years in business, type and size of business.
Scoring ABCs: D&B calculates a Paydex score as a key indicator of business payment performance on a 0-100 scale. The higher the score, the better. A business that always pays right on time might score an 80; above that you’d be paying early. So anything above, say, a 70 is considered pretty good in the eyes of potential creditors. Below that, and you’re a slow payer. But to even have a Paydex score, at least four companies must be reporting your pay habits to D&B.
A business credit report may also include a “DBT” score, which stands for “Days Beyond Term.” DBT is a weighted average number of days beyond the due date that a business pays its bills. Experian, for example, calculates DBT at +30 days. Thus, a DBT score of 5 means that the business pays its bills an average of 35 days after invoicing.
Establishing or improving a score: The credit agencies themselves, along with a variety of other services will help you establish a business credit report, including a full credit report with payment references, for a fee. According to Experian, however, one of the best ways to build and protect your business credit is to simply pay your utility bills on time. An easy way to do that is to sign up for automatic bill pay through your bank; no worries about late payments dragging down your credit score.
These resources can help:
- Experian just launched a helpful new website called BusinessCreditFacts.com with questions and answers about establishing and maintaining business credit. There’s also a tool to submit requests to update a business credit report, and ways to sign up for fee-based credit monitoring services.
- D&B has the largest business database of anyone, and most companies seeking to check your business credit profile will go here. You can get listed in the database with a unique DUNS number (an internationally recognized identifier) for free; or sign up for D&B’s CreditBuilder service that will help you build a complete credit profile.
- Your Business Credit specializes in helping small businesses establish or improve their D&B credit ratings.