Benefits of Good Business Credit
Many banks and other lenders will look at the scores and ratings in a company’s business credit file to help gauge that company’s financial health before approving a loan or extending credit. In addition to providing clarity to potential lenders, a strong business credit file may also:
- Build Confidence: Companies who know they have a strong business credit file tend to feel more confident when applying for loans. Companies with poorer credit or whose leaders don’t understand business credit are less likely to even apply for loans when they need them. Often, being denied for a loan is the catalyst for business owners to start seeking solutions to build and monitor their business credit file.
- Show Credibility: Put simply, lenders want to know that they’re going to get their money back on time. A business owner’s character and professionalism certainly can’t hurt, but a business’s credit report – which details things such as payment history and likelihood that a business will fail in the next 12 months – can go a lot further to help demonstrate business stability.
Trade Credit: When Businesses Lend to Each Other
Many businesses seek funding from banks, credit unions, and other financial institutions. However, businesses also extend trade credit to one another, allowing customers to be invoiced for goods or services. Many small businesses rely on trade credit to avoid cash-flow crunches, but the vendor allowing for payment at a later date must be confident it’ll actually receive that payment. Checking another company’s business credit scores and ratings can be one of the ways to help evaluate the risk of extending trade credit.
Five Key Factors in Assessing a Business’s Creditworthiness
Here are five key factors lenders may consider when evaluating a company’s creditworthiness:
- Years in Business: Several Dun & Bradstreet scores and ratings consider the age of a business when assigning risk values, and lenders often find this information helpful. New businesses may not have had time to build a financial cushion for themselves in the event of economic headwinds. A startup is unlikely to have established payment experiences with other creditors. Finally, lenders may see funding a first-time business owner’s efforts as an exceedingly risky endeavor.
- Payment History: Past payment experiences are submitted by trade references,* which are lenders or suppliers that report to Dun & Bradstreet their transactions with a company. Companies that have a history of repaying their debts on time are thought to represent less risk to future lenders. While there are no guarantees that this responsible financial behavior will continue, a collection of positive payment experiences may impact a business’s PAYDEX® Score. This, in turn, can make a company more creditworthy in the eyes of lenders. A business needs at least four trade references on file with Dun & Bradstreet before a PAYDEX Score can be determined. A maximum of 875 trade references can be considered during this process, though no more than 80 are reported in a business credit report.
- Company Financial Statements: Because credibility can include how likely a business is to repay its debts, it should come as no surprise that a company’s financial statements can be considered when determining its credit scores and ratings. A business owner can supply financial documents to Dun & Bradstreet, which may allow Dun & Bradstreet to help deliver a more comprehensive evaluation of the company’s credibility. These documents can be submitted for free through Company Update.
- Bankruptcies, Tax Liens, and Other Public Records: Much like payment experiences, public records can provide insights into the past behavior of a business. Dun & Bradstreet collects public information in all 50 states and the District of Columbia and may display these details in its business credit reports. Dun & Bradstreet attempts to compile a comprehensive database, including bankruptcies, tax liens, lawsuits, and legal judgments. Public records that show financial stress on a company may make it less palatable to lenders.
- Industry Norms: The business information gathered by Dun & Bradstreet is not just used to help determine scores and ratings for individual companies. The aggregate data can reveal industry trends and norms, which can then be used as a benchmark to help determine the credibility of firms within that industry. Not all industries are created equal; earnings and debt loads may vary. Drawing upon its data resources allows Dun & Bradstreet to put a business’s credibility in context.
What Sole Proprietors Need to Know About Business Credit
It’s not unusual for business owners to organize their companies as sole proprietorships. In this setup, the owner and business are seen as one entity. Unfortunately, this can complicate the company’s efforts to build business credit. Sole proprietorships cannot establish business credit files separate from the personal credit of the owner. That means lenders may pull the owner’s personal credit report when judging the credibility of the business. Past personal financial mistakes can impact the business’s ability to get financing. And debts acquired in the course of doing business may be recorded in the owner’s personal credit file. Business owners should consult an attorney or financial expert before deciding upon a structure for their company.
A business’s credibility is determined by a variety of factors. Some can be influenced by business owners, such as payment behaviors. Others are largely out of their hands, such as the number of years they’ve been in business. However, the more a business owner understands what lenders often look for in a credible company, the better prepared they can be to manage their business credit file.
*Trade References will be added subject to Dun & Bradstreet verification and acceptance. Trade References are counted as fulfilled when a qualified reference is successfully added to your report. Please see the Trade References glossary page for eligibility, process and other information regarding Trade References.