If you’re curious to learn more about business credit reports, you may already have a basic understanding of what business credit is or at the very least, you know that it exists. If so, you’re on the right track. Many small businesses, especially those just starting out, have never even heard the term “business credit” before. In this article, we’ll answer some of your biggest questions, including:
What is a Business Credit Report?
If business credit is defined as a company’s perceived ability to make good on financial obligations according to the terms of its contracts, a business credit report is the means by which that ability is expressed.
In other words, business credit reports can help illustrate clearly and quickly what a company’s payment behavior has been like and how that might impact their ability to fulfill contractual obligations now and in the future. Oftentimes, lenders, suppliers, and potential business partners will rely on these reports to help determine the level of risk associated with certain companies and use that information to help decide whether to do business with them or not.
What’s Inside a Business Credit Report?
Dun & Bradstreet’s comprehensive business credit reports contain more than just operational information and trade payment history. They consist of multiple types of credit scores, ratings and data – ranging from predictive (future) to performance-based (historical) – that can help showcase a company’s reliability and financial stability, including:
D&B Viability Rating®
A highly reliable and multidimensional credit rating system that holistically evaluates a company’s current and future health and forecasts what the next year may look like – specifically the probability that the firm will go out of business, become inactive, or go bankrupt.
D&B® Failure Score
Predicts the likelihood that a business will seek legal relief from its creditors, cease business operations without paying all its creditors in full, voluntarily withdraw from business operation and leave unpaid obligations, go into receivership or reorganization, or make an arrangement for the benefit of creditors over the next 12 months based on information in the Data Cloud.
D&B® Delinquency Predictor Score
Predicts the likelihood that a company will pay in a severely delinquent manner (10% or more of their obligations 91+ days past term), seek legal relief from creditors, or cease operations without paying all creditors in full during the next 12 months.
Provides a unique monetarily weighted numerical indicator of how a firm has paid its bills and is a proprietary measure of historical trade payment performance based on trade experiences reported to Dun & Bradstreet.
Bankruptcies, lawsuits, liens, judgments, and other public filings – also crucial in identifying credit risk. Dun & Bradstreet collects business-related bankruptcy information from every bankruptcy court in the US, and each bankruptcy is investigated and confirmed by an analyst before being posted to a business credit report. Also, Dun & Bradstreet is one of the few providers to feature lawsuits in its commercial credit reports.
Why Are Business Credit Scores and Ratings Important?
Your Business Credit
Someday, if it hasn’t happened already, your business may need help financing the purchase of new machinery, acquiring inventory, or expanding your operations. When unexpected economic events arise, you may need to open a line of credit to remain operational. Even recurring costs like payroll can be covered by short-term loans.
In most cases, lenders require assurances that they’ll be repaid on time, and one way they can help manage repayment risk is by reviewing the business’s credit scores and ratings on file with the major reporting agencies like Dun & Bradstreet. These indicators can help banks determine whether or not to lend money and at what interest rates.
In addition, many businesses’ credit files are evaluated when they bid on contracts or shop their services to potential business partners. That’s because companies want to make sure they’re working with businesses that can deliver products on time or complete projects as promised – and have a low risk of going out of business.
Building strong business credit has many positive implications besides just helping protect yourself from personal liability. For example, business credit may be required or advantageous when:
- Requesting higher trade credit limits from suppliers
- Requesting lower premiums on insurance policies
- Negotiating lease terms on equipment and real estate
- Negotiating freight terms
- Obtaining payroll credit
- Winning contracts for national distribution from a large chain
- Bidding on more lucrative contracts
- Seeking line-of-credit increases
- Seeking more favorable interest rates on loans from banks
- Applying for funds to cover an unexpected emergency
Others’ Business Credit
You may also be in a position where you’ll want or need access to other companies’ business credit scores and ratings. For example, if your company offers lines of credit to its customers, you’ll want to have visibility into their payment history. If you’re in a growth phase, looking to join forces with another business, having access to their risk assessment scores and ratings can be essential in helping determine whether they’re a viable potential partner or not.
How Do You Establish Business Credit?
Ideally, business owners think about credit before they start a company. A business’s structure can affect how lenders or potential business partners judge its credit outlook. To structure your business in the most advantageous way, we recommend following these four steps:
- Establish Your Business as a Separate Entity
Separation of owner and enterprise is often the best approach when looking to establish your business credit. As a corporation or limited liability corporations (LLC), your business will be classified as an independent entity, helping reduce a connection to your personal credit. If your business exists as a sole proprietorship, your business’s credibility may be linked to your personal credit. As a result, lenders and potential business partners may rely on your personal credit score to judge the business.
- Register for a Dun & Bradstreet D-U-N-S® Number
This will be the number some lenders and potential business partners use to check your business’s credit profile, so you’ll want to have it available before applying for a loan.
- Get an Employer Identification Number From the IRS
An Employer Identification Number (EIN) is required to file your company’s taxes. Banks and potential business partners can also request it when you fill out paperwork. You can apply for a free EIN with the IRS.
- Open a Business Bank Account
Opening a separate business bank account can be another way to strengthen your business’s independent identity. A business account can also help you build a track record with the bank. If and when you do apply for credit, you’ll come to them as an existing customer.
Once you’ve followed these steps, credit, vendor, or supplier payments you make can count toward your Dun & Bradstreet credit scores and ratings.
How Can Low Business Credit Scores Be Improved?
If your business credit scores are low, there are a few steps you can start taking now to potentially help them improve.
Make Sure Your Business Credit File is Up to Date
Check your business credit file regularly and whenever possible to make sure the information in it is up to date and submit correction requests to any errors. You can even dispute payment experiences in your file that you believe to be inaccurate.
Make Payments on Time
Your business should strive to make all payments on time (or early) in order to help avoid the appearance of financial stress on your business credit profile. Why? Because lenders want to know that they’ll get a return on their investment, and potential business partners want to know that you’re reliable.
Failure to pay invoices in a timely manner can lead creditors to submit negative reports to the business credit agencies. A history of delays or defaults can damage your ability to obtain credit or prove your credibility to another company.
Supply Payment Experiences to Dun & Bradstreet
Some of Dun & Bradstreet’s small business products give companies the ability to manually submit trade references that can report their payment experiences with your company to Dun & Bradstreet. These payment experiences can impact your Dun & Bradstreet scores and ratings, so you want to be sure to pay your vendors on time or early to help build positive business relationships.
* CreditSignal only shows certain of your Dun & Bradstreet scores for 14 days, then provides directional changes to such scores. It also indicates the number of individual request(s) for information, which may include but are not limited to credit information, by a unique external customer(s) on a D-U-N-S® Number. To view additional scores and ratings, view scores and ratings following the 14-day period, or learn about what industries are making such requests, we recommend that you upgrade to one of our paid credit monitoring or credit building solutions.