What does it mean to be a credit worthy business? Well, suppose you have a great small business concept. Congratulations! You are getting ready to join the engine that propels about 44% of all U.S. economic activity. You have a business plan, understand what size of rental space you need, how much money you need, and what you can afford to pay. You even have four spaces you think will do the trick. So are you ready to start completing commercial lease and loan applications for the space and money you will need? Well, maybe not.
We recommend taking one more critical step before completing your first lease application or any effort to obtain commercial credit. Give your credit reports, and overall financial health, a thorough review. A Federal Trade Commission study revealed that 20% of people have an error on at least one of their credit reports. That is a remarkable number of errors. Worse, however, is the fact that one of those errors may be the basis for a rejection of your business application. Mercifully, it is easier now, more than ever before, to detect the errors and get them corrected. So with that in mind, and because in the time of COVID-19, you may have a wee bit more time on your hands, here are my suggestions on how to do a little spring cleaning on your credit file. No mask required.
Business and Personal Credit Scores
Any one of us that has bought a house or a car has some degree of familiarity with consumer credit scores. But what about business scores? While business credit scores are similar, there are differences, and you need to make sure you understand both. Further, you need to understand what your landlord or lender will be looking at. For example, if you are a start-up, you may only have consumer scores to consider. But, if you are an established business looking for a sizable space or loan, the business and personal scores may come into play because of the likelihood of a personal guarantee. Thus, you need to to review and determine if those reports say you have a credit worthy business.
A key distinction between business and consumer scores is that consumers are protected under the Fair Credit Reporting Act (FCRA), while businesses do not enjoy those protections. Permission is not needed to look up your business scores, and anyone can do it, as often as they like. This includes your competitors! This increases the need for periodic monitoring of your business scores to make sure you are being fairly portrayed.
We all understand how your consumer credit score can affect most major financial undertakings. And in broad strokes, the same is true about your business credit scores. According to Credit Karma, a solid business credit profile can help in the following ways:
- Protect your consumer credit score.
- Limit personal liability.
- Increase your overall credit capacity.
- Help you secure more favorable terms on loans.
- Help you qualify for lower insurance premiums.
- Most importantly, impress anyone evaluating your business — whether they’re investors, partners, vendors or clients.
Where to Get Your Consumer and Business Credit Scores
For consumers, you are probably aware that there are three main credit score reporting agencies. They are Experian, Equifax, and TransUnion. What you may not know is that these agencies have created several different scoring models that they make available to specific types of businesses on a subscription basis. For example, a mortgage lender may subscribe to the Fair Isaac Risk Model Version II from Experian or the FICO Classic 04 from TransUnion. Mortgage lenders subscribe to these specific services because they are designed with complex algorithms to provide information specific to mortgages and your likelihood of repayment. While you may never be able to access one of the specific scoring models without a subscription, know that your overall profile still provides the basis for these more specific models.
Thanks to the FCRA, every consumer is entitled to a free copy of their credit report one time per year. The easiest resource for these free reports is annualcreditreport.com. This free service allows you to fill out a simple form, and then decide what reports you want to look at. While initially, you may want to look at all three, you should at least consider ordering one every four months. Because you are entitled to a free credit report from each of the Bureaus only one time per year, to avoid having to wait a whole year, you can spread out your requests for individual reports and thereby have an opportunity to review a single report every four months rather than three annually.
For businesses, the landscape is quite different. The main players in this arena are Experian Business, Equifax Small Business, and Dun and Bradstreet. Similar to the consumer arena, these agencies have created different subscription services they sell to businesses, or your competitors, that can use the credit history of businesses for any purpose. Experian offers its Intelliscore PlusSM, Equifax offers the FICO LiquidCredit Small Business Scoring Service, and D&B offers a PAYDEX score. These services draw information from every conceivable source (from the Yellow Pages to UCC Filings) about your business. Then their algorithms go to work and come up with a score.
Because business credit information is not protected by the FCRA, your business’s credit profile can be researched for any reason or no reason at all. The compiler of this information can then sell it to anyone that subscribes to their service. All without your permission, or knowledge. D&B, et al, obviously have a financial interest in providing accurate information, but there is no guarantee that the information they report is accurate. For this reason alone, it is truly important to monitor your business credit reports for inaccuracies.
So how do you obtain a business credit report?
Well, most of the providers will, for a fee, allow you to view your business’s credit report, after proving you are the owner. For example, a business owner can subscribe to D&B’s CreditBuilder Plus product for the tidy sum of $149 per month. Equifax will charge you $99.95 each time you request a Business Credit Risk report. For about $50 for Experian will provide its ProfilePlus report. While these reports can get expensive in a hurry, remember that your competitors or virtually anyone with a few dollars in their hand can get these reports. As such, you should consider purchasing at least one of them.
While not all-encompassing, you can obtain some information for free. NAV.com gives small business owners access to some of these reports as well as a fountain of information and tools on building business credit, including recommendations for loans and credit cards for your business. A free NAV account will get you access to a Business Summary Credit Report from Experian and D&B, business credit grades from Intelliscore and PAYDEX, and your consumer scores from Experian. At a minimum, NAV will give you a wealth of information to get you started. They also offer broader sources of information from all the business agencies for as little as $30 per month, if you decide to pay for their service.
Correcting Inaccuracies
Each consumer credit reporting agency now has an online dispute process. For consumer credit reports, according to the FCRA, a credit bureau has 30 days to correct any inaccuracies on your file. You can dispute your consumer credit reports at Experian disputes, TransUnion disputes, and Equifax disputes.
Disputes are not as simple for businesses. For example, D&B mandates that you contact their customer service department at 800-234-3867 and “discuss” your dispute.
Equifax states in no uncertain terms that only “information contained in the Public Records and Credit Data sections of the report may be changed as a result of a dispute.” To start your Equifax business dispute, you must open an account, log in into the Member Center account, and then contact Equifax via one of the options listed there, and they promise to “work with you to determine the details of the dispute” and only then will supply you with a Research Request Form. Once you complete the form, Equifax will request verification of the dispute information, and within 45-60 days, they will let you know the result of their inquiry.
Experian’s business report dispute process is equally onerous, but at least they “generally” complete their investigation within 30 days. Bottom line, business report disputes will be an uphill battle.
Dos and Don'ts Before You Apply for Commercial Credit or a Lease
All credit reporting agencies, whether business or consumer, focus on three main criteria: your overall debt; the timeliness of debt payments; and the overall financial picture (debt to income/revenue, length of history, etc). While that list may be short, the list of information that can affect that criteria is quite long. Numerous pieces of information are compiled and compared to reach a credit score. As such, there are some less than obvious things you should and should not do to boost your overall score. Here is a list of some of the dos and don’ts that may have a direct effect on your score:
- DO remove inaccuracies. First and foremost, these have to be removed. Because of the complex range of methods used to determine a score, you never really know how any one, or a combination of seemingly innocuous inaccuracies could add up to reduce your score. Be persistent in your reviews and your efforts to have corrections made. Bar none, correcting inaccuracies can have the greatest and fastest impact on a credit score.
- DON’T close accounts. One factor that plays a major role in determining your score is the length of your business or credit history. Thus, closing accounts with a long history, even if it is bad, may hurt your credit score. In general, keeping accounts with a long history open will help your scores.
- DON’T pay all your balances to zero. Using credit and paying it on time is the name of the game. If you have five credit cards with a combined limit of $100,000 but never use them, or run a balance on them, it is difficult to judge how well you will make rent or loan payments. The sweet spot seems to be around 30% of any individual account’s credit limit, so keep any account under 30% of its limit, and you will likely benefit. Think of the interest as an investment in your financial future.
- DO open a new account or apply for a credit line increase. As discussed above, accounts should be kept at or below 30% of your overall credit limit. However, sometimes it is not possible to achieve that level in a short amount of time, like right before you are applying for commercial credit. While you may not be able to reduce the amount you owe, you may be able to increase your credit limit or open a new account. In so doing, you increase the distance between your credit debt and your limits, thereby getting your debt ratio close to or below the 30% sweet spot.
- DO establish a corporation or LLC and open business accounts. While business credit reporting agencies do a thorough job of finding information about you, you make it exponentially harder on them if you do not have an “on paper” business. By that I mean some sort of corporate entity and separate business banking and credit accounts. In this day and age, these are simple steps that can go a long way toward establishing a business record that will help you get commercial credit.
- DO opt-out of pre-approved credit offers. While most of us just dispose of the numerous pre-approved credit offers we get each month, these offers can be used by thieves to steal your identity and ultimately your money. An easy way to stop these pre-approved offers, (and alleviate the carpal tunnel pain from flinging each one in the trash can) is to go to optoutprescreen.com. This is the official consumer credit reporting industry website to tell the bureaus to stop sending your credit information to the pre-approved marketers who create the mail. A simple step that can help.
- DO understand credit scoring scales. Most people are aware that the commonly used consumer credit scale ranges from 300 to 850 (bad to excellent), with anything over 690 considered to be good credit. On the business side, however, IntelliScore and PAYDEX use a 0-100 scale. For PAYDEX, a score of 80 means you pay on time, 70 means you pay two weeks late, and 50 or below means at least thirty days late on payments. Intelliscore ranks you by risk class, i.e., 76 and over is low risk, 51-75 is low to medium risk, 26-50 is medium, and 25 and under is either medium-high or high risk.
- DO contemplate paying delinquencies and judgments. While states have different laws governing the reporting of these types of problems to credit bureaus, generally speaking, they will stay on your record for at least seven years. They can also be revived in certain states before that time, effectively restarting the clock. As such, you may want to consider paying off the delinquency or judgment. While it will still be a hit to your overall score, the duration of that hit may be significantly less than seven years.
- DO understand the difference between hard and soft inquiries to your credit. Anytime a request is made to a reporting bureau for information about your credit score, it is deemed to be either a “soft” or “hard” inquiry. Generally speaking, a credit check made by a financial institution for the purpose of making a lending decision is deemed to be a hard inquiry. While too many hard inquiries will hurt your credit score (applying for six credit cards in one month for example), hard inquiries can also be disputed. Conversely, any other type of inquiry is deemed to be a soft inquiry and will not affect your score. So whenever you check your score, that is a soft inquiry, as are all those inquiries made by the companies that create those prequalified offers of credit.
- DO request the basis for a denial of credit. If you are denied credit, request a copy of the report that formed the basis of the denial. For consumer credit denials, this should be free. For businesses, this may require a few phone calls, but you should be able to put your hands on one.
Conclusion
Like taxes (and probably a dozen more unique aspects of your business) your prompt and diligent attention will carry the day. Thorough and periodic reviews of these reports will make the whole process of obtaining commercial credit easier and much less stressful. No small amount of patience will be needed to fix problems or correct inaccuracies. But in the long run, it is time well spent and you will sleep better in the end knowing that you have done your best to be a credit worthy business. Good luck!
