In the current economic environment, business owners understand that a good personal credit score is critical to their financial well-being. But what many neglect is their company’s business credit score. Inextricably linked to a company’s pecuniary health, the score can influence everything from loan interest rates to insurance premiums.
The business credit score offers an objective snapshot of how a company handles its financial responsibilities, as a personal credit score does for an individual. Also known as a commercial risk score, it includes a range of information from payment history and credit utilization to delinquencies, collections, bankruptcies, and judgments to even business age, industry risk, and number of employees. Dan Meder, vice president of marketing and product management for business information services at the global information services company Experian, says credit bureaus such as his use certain algorithms that examine key risk factors to express as a score the likelihood that a business will repay its debts.
Despite the business climate, Experian’s Business Benchmark Report, which offers a monthly analysis of small business health, shows that commercial credit scores have been on the rise. For the first quarter of 2010, scores increased by nearly 2%, suggesting a slight improvement in the ability of companies to meet payment obligations over the next 12 to 24 months.
But just how many business owners actually understand commercial credit scores? Many entrepreneurs don’t know about business credit ratings as a whole. “It’s not in the business psyche,†says Arlene Williams, executive vice president of Seaway Bank and Trust Co. (No. 8 on the BE Banks list with $385 million in assets). “A lot of businesses just aren’t aware they exist.â€
“Many of the small businesses we work with have not developed a business credit score yet,†says Lesia Bates Moss, president of Seedco Financial , a national nonprofit community finance organization focused on lending to small businesses in traditionally underserved communities.
“Small business owners might think of their consumer credit report as their business credit report,†says Ross McKay, vice president of commercial information solutions for Equifax Inc., one of the leading consumer credit reporting agencies in the U.S. “But they need to understand that in many cases, there is a separate business credit report.â€
Of course, lack of knowledge doesn’t exempt business owners from being rated.
When is the report established?
Companies can have a business credit score without even knowing it, notes Meder. Usually, as soon as businesses establish a relationship with banks and vendors that consistently report to credit bureaus, credit agencies begin to generate commercial reports about them.
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In addition to viewing personal credit reports, banks such as Chicago-based Seaway are beginning to rely more on commercial credit reports to get a more accurate understanding of companies that solicit their help, says Williams. Banks may also pull a business’ credit report when deciding about a loan, especially if the business is well established, she adds.
How is it scored?
Credit reporting agencies dole out commercial credit scores much like personal credit scores, and each one has its own way of grading reports. While they often use different scales in scoring, some similarities do exist.
The scoring systems of Dun and Bradstreet, a provider of credit information and credit reports, and Experian both use a scale of 1 to 100, with a score of 80 or better being preferred–meaning that all payments are prompt. The national average for businesses is around 58.
Taking charge
The best way to find out what information credit agencies have compiled on your company is to check your business credit report twice a year, recommends Bates Moss. Biannual monitoring is beneficial for a couple of reasons: It shows business owners what lenders might see when they pull information on their companies, and it can also help owners identify and correct erroneous data.
Businesses can also take charge of the report by asking vendors, suppliers, and lenders they work with to report transactions to credit agencies, key opportunities to enhance their credit profile. “If you are paying a particular vendor well, you want to make sure that makes it into your credit report,†says Meder.
Preventive measures
Williams says the most salient component of a commercial credit report is the record of a company’s timely payments. Banks like to see borrowers who repay their debts, and the level of debt should be consistent with the company’s line of business, she adds. “Entrepreneurs shouldn’t be overextended in their credit,†warns Meder, who notes that a high debt-to-credit ratio is a key factor that will negatively affect the score, just as it does a personal credit score.
Repairing the damage
If a business owner notices an error in the report, he or she should immediately notify the credit reporting agencies and begin the proceedings to launch an investigation. If the negative marks on the report are legitimate, the owner should develop a plan to manage the debt prudently and tackle any internal issues that might have caused problems.
Don’t make it personal
Under the Fair Credit Reporting Act, lenders can review a business owner’s consumer information for business purposes if the business is a sole proprietorship or partnership. While it’s likely that there will always be some overlap of personal and business credit for small business entrepreneurs, Bates Moss says Seedco encourages companies to slowly separate personal and commercial credit. “We support moving the business owner from a personal credit score to a hybrid credit score, to graduating to a business credit score,†she says.
Meder asserts that ultimately when it comes to taking excellent care of your credit, “Responsibility extends beyond the business to the owner.â€
Emerald S. Morrow is a freelance contributor to Black Enterprise.