Getting a loan for your business can be hard, especially if the business credit bureaus have assigned you a low rating.
Based on the data collected from banks, credit card companies, suppliers and other sources, business credit bureaus create your business credit report. This report displays your company’s credit score, an indicator of your financial solvency.
The first step to building your business credit is creating a business credit profile. This will help your business build supplemental credit history to your personal credit, and expands your options in accessing capital for your business.
How do I create my business credit history?
As soon as you start your business, you should start building your credit history. Follow these steps to create your company’s credit profile:
- Establish your company as a Corporation, Partnership or LLC
- Get an Employer Identification Number (EIN).
- Open a business bank account, and use only for business related transactions
- Apply for a business credit card. Make sure the creditor reports your payments to at least one business credit bureau.
- Establish lines of credit with all your suppliers. These should also report the payments to the business credit bureaus.
- Pay your financial obligations on time.
Why is my business credit history key to the future of my company?
Because the business credit bureaus study this history thoroughly to create your credit report, and getting that loan you need to expand your business depends on that report. When your company applies for a loan or a business credit card, the bank, the issuer of the card or the lender asks any of the business credit bureaus for your business credit report to check your financial solvency; in other words, to verify that you are able to fulfill your obligations.
Depending on the information they obtain, they will decide if you are trustworthy enough to lend you money. A negative review of your company’s history can reduce or eliminate your debt capacity for years, or simply get you higher interest rates on your loan.
You may wonder where the business credit bureaus get all the data that make up your business credit profile. To collect all the information about your credit history and other relevant data to calculate your credit score, a credit bureau uses several sources:
- Information about your payments to suppliers and lenders.
- Claims, repossessions and lawsuits.
- Corporate financial reports.
- Records of the company’s registration and any declaration of bankruptcy in court.
- Contracts, subsidies, loans, and disqualifications by the Federal Government.
- Data on the Internet.
- Press releases about the company, and news published in the media.
- Yellow pages and other directories.
- Other research and interviews with company managers.
How do business credit bureaus calculate my business credit score?
Business credit bureaus have no obligation to disclose the algorithm they use to calculate a business credit score. In fact, the three main business credit bureaus don’t use the same information to create it, and they evaluate the data based on very different parameters. However, these are the main factors that business credit bureaus could take into account:
- Payment history: Make sure you pay your debts on time. By doing so, the lenders will know that you have a reliable business and will be more willing to lend you money with more favorable conditions.
- Use of credit: Don’t use 10º% of the limit in your business credit cards. This gives the impression that you can’t pay your debts. Try to keep your credit limit under 30%.
- Years in the industry: A company with an established credit history, that pays its debts on time and maintains low rates of credit use, is more likely to receive loans with better rates than a new business without any history.
- A number of credit applications: requesting a large number of loans can make lenders believe that your business is losing control. This means fewer chances of being approved for a loan, or less favorable terms on the loan.
What are the main business credit bureaus?
Any company incorporated as an LLC, and with an Employer Identification Number, can be evaluated by one of the three main business credit bureaus:
This credit bureau collects data from payment history, public records of companies, and demographic information to calculate a credit score called Intelliscore Plus. This score ranges from 1 to 100 and is used to predict the probability that a business will pay its obligations on time.
Obviously, the higher the score, the better. A score between 76 and 100 points indicates that a company pays its debts on time. Scores below 76 indicate different risk categories.
An Experian credit report contains other information about the business, such as the average number of days you are late on your payments. It also includes the demands and repossessions the company may have, and the number of times there has been a credit inquiry. This is an example of the report issued by this company.
Equifax has a score called Payment Index. To figure it out, this credit bureau only takes into account the payment history. This score also ranges from 1 to 100. Obtaining 90 or more points is a sign that payments to suppliers have been made on time. A lower rating indicates how many days, on average, the business exceeds the deadline to pay. This is an example of a credit report issued by Equifax.
Payment Index is not designed to predict future payment compliance. Equifax has two other scores that take care of that: Business Credit Risk Score and Business Failure Score.
Business Credit Risk Score indicates how likely it is that a business accumulates more than 90 days of delinquency in its debts. This score ranges from 101 to 992. The higher the score, the lower the risk of delinquency gets predicted.
Business Failure Score, on the other hand, indicates how feasible it is for a business to go bankrupt in the next 12 months. The score goes from 1000 to 1880. As you can guess, the higher the score, the lower the risk of failure of the company.
Dun & Bradstreet uses a score called PAYDEX to measure risk. This indicates whether the debts were paid on time or not during the last year. The score ranges from 1 to 100. As with the other agencies, higher scores indicate a better payment history:
- 80 – 100: low risk of late payments
- 50 – 79: medium risk
- 0 – 49: high risk
Dun & Bradstreet has two other more detailed reports: Commercial Credit Score and Financial Stress Score.
Commercial Credit Score ranges from 101 to 670 points and forecasts the chances of default on a loan during the next year. A very low score indicates a high risk of default.
Finally, the Financial Stress Score predicts how feasible it is for a business to fail in the next 12 months. In this indicator, the rates vary from 1001 to 1875. The lower the rating, the greater the risk that the business will fail.
This is an example of the credit report issued by Dun & Bradstreet.
Check your business credit report regularly
Check your business credit report periodically searching for inaccurate information. If you find an error in your report, immediately inform the credit bureau that issued it, and if necessary, submit any document that can support your claim.
Pay close attention to any errors that may appear in the public records data. Items such as bankruptcies, claims for debt collection and processes to confiscate your property registered in the report during the last seven years could cause your loan application to be rejected.
Keep in mind that, unlike personal credit reports, business credit reports are not free, and if you want to get your business credit report from any of these business credit bureaus, you’ll have to pay a fee.
Your business credit report contains a large amount of information about your company and records about how it handles its financial obligations. It is essential to know what data is being collected about your business by a commercial credit bureau.
This report, eventually, will be key for a lender to decide if your business can access a loan or any type of financing. Start right now creating a credit history for your business, so that other companies, banks, lenders and suppliers can evaluate your solvency and give you that loan that you need to make your business grow.
Speaking of loans, take the steps to apply for a business loan with Camino Financial. Submitting your application will only take a few minutes and the process will not affect your credit history or your credit score. Also take in mind that, once you get your loan, Camino Financial reports this information to the business credit bureaus, which will help you build your credit history.