Settling the Score

Small businesses are big business here in Frisco, but many local business owners are not using one of their most essential resources — their business credit score. While owning any business requires funds or securing access to them, many businesses give little thought to their business credit line until they are in dire straits and cash-strapped. According to a report from the U.S. Business Administration, 20 percent of small business loans are denied due to poor business credit. Much of this stems from inattentive or ill-informed business owners about these imperative credit lines. 

Thankfully, we do have a list of everything one would need to know about business credit reports, including what they are, how to check them and what to do to improve overall scores. 

What is a Business Credit Score? Why is it Needed? 

A business credit score is key to a business’ financial life. All businesses require a certain amount of cash flow to function and grow. In some cases, loans and lines of credit are essential for expanding and paying for basic supplies or making payroll. Simply put, the most obvious reason for having good credit is to enable a business to borrow money. Loans often help start a business, help it survive during challenging times and help it expand to become more successful.

The business credit score itself is a number that represents how trustworthy a business is in terms of its financial viability. The easiest way for a customer, bank or other lending institution to gauge trustworthiness is to look up a business credit score. A high business credit score communicates a business’ ability to repay lenders on time (or ahead of time) from past transactions and vice versa. Ultimately, the business credit score informs banks and lenders whether a financial institution should lend to the business and by how much. 

Kevin Hodes, the owner, founder and CEO of Swypit, a locally-based company providing electronic payment processing solutions and credit card processing, explains, “When creating an expanding, sustainable company, business credit scores are imperative because lenders use it to consider how likely a business owner is to repay a loan. To establish a business credit score, business owners must file for a federal tax identification number to create a business credit line and ensure that he or she is not personally liable for any potential issues. An owner never should use personal credit. It is just not wise.” 

Unlike personal credit records, which one can only obtain about oneself, business credit scores are available to anyone willing to pay for them, including competitors, customers and suppliers. Often, each of these establishments research a company before deciding to do business with them. 

How to Check Business Credit

Checking a company’s business credit is fundamental for an organization. Many online credit agencies exist, but the biggest name in the industry is Dun & Bradstreet®, with a database of information on more than 235 million companies around the world. Other commonly-used agencies include Equifax® and Experian®, and each agency charges differently for the collection, analysis and production of a credit report. Companies can provide drastically different results because each organization collects and analyzes data differently. 

Dun & Bradstreet creates a detailed report and includes a credit summary, a credit risk score, a PAYDEX® score, financial stress score and industry payment benchmark. The cost for this report is $61.99. Equifax charges $99.99 for their report, providing a credit summary, business credit score, business failure score, payment trends comparison to industry norms, credit risk score and public records. Experian charges only $36.95 for their report, but it is limited to only the most basic information, including a credit summary, business credit score, public records and payment summary trends. 

Once a business receives its credit report, it is crucial for them to review the data and ensure all information is accurate. Mistakes can easily be made, so business owners should correct issues and update information as soon as possible to ensure the report does not adversely affect the business and plans to expand. “As a 20-year veteran in the business, I can attest that most business owners do not realize the importance of business credit scores until they visit a lending institution to ask for a loan,” continues Mr. Hodes. “I recommend business owners watch their own business credit so they are in a position to make decisions for themselves and their future.” 

Monitoring and Improving a Business Credit Score

A good credit score can go bad quickly. Indeed, Dun & Bradstreet estimates that one in every three businesses suffers a decline in their credit score over a three-month period. Every financial action taken by a business potentially impacts their score. By monitoring a business’ credit score consistently, a business owner catches mistakes and can address changes to their rate before it affects future dealings. 

To improve a business credit score, businesses can pay bills on time or ahead of schedule, take care of old liens, taxes and debts, open multiple lines of credit and pay the loans on time responsibly and maintain a decent “credit utilization” ratio. Owning a business credit card is not enough. A business owner must use the card and make payments on it. However, constantly maxing out a line of credit is a red flag to creditors. Businesses should keep credit utilization around 25 to 40 percent and pay it back faster than required. 

Why Checking Your Business Credit Score Matters

It is a thin line between success and failure in the world of small business. Having as much information on hand about a business’ past and predicted future helps an owner stay ahead of the game. When an owner checks his or her business credit score (and keeps checking it), it helps a business grow strong. “Keeping a viable business is tough to do, and, unfortunately, many owners open their doors without doing their homework, which is not smart,” notes Mr. Hodes. “To business owners, I recommend they do their research, surround themselves with respectable mentors and get involved with local organizations, such as the Chamber of Commerce. It is important for all business, and this information cannot be overlooked. By taking control of what can be done and becoming aware of the facts, businesses open up opportunities for themselves.”

Carolyn Cameron
Carolyn Cameron is an online writer and marketer who fancies coffee, her family, random creative endeavors and finishing a home project in her off time.