Business owners have a lot to concern themselves with. In fact, if you conducted a poll, you will probably see that topics that rank toward the top of the list are sales and marketing, payroll, customer satisfaction, account receivables, and those types of issues. Concerns over their business credit report are probably not anywhere near the leaderboard.
Should it be? One would think that since so much can be impacted by one’s business credit report, such as office rent or financing, that it would be a concern that is closer to the top of the list. In reality, it isn’t. This is because so many businesses fail during the early years that they are more concerned with simply surviving, than worrying about their business credit report. In addition, many business owners just don’t understand business credit. Even if they have a solid understanding of personal credit reports, a business credit report can be extremely different.
To help shed some light on the issue, let’s take a look at how a business credit score is determined. The first thing that a credit agency has to do is obtain information. For individual consumers, this is much easier since the process is refined, and down to a science. For businesses, there are three main sources as to where this information can come from:
- Suppliers and lenders. Often times, businesses will need availability to credit in order to purchase supplies or product, which is then sold at a premium. The proceeds will be used to pay off the credit; then they start the cycle over again. Established businesses will enter into such arrangements with banks and lending institutions, whereas newer businesses will have to discuss options with a supplier. Whoever they choose to go through can provide information on their payment history and in general, how well they have managed their credit. This information is then fed to a credit reporting agency, and will be available on their business credit report, and will factor into their score.
- Courts. Local, county, and state courts keep everything, so legal filings are available for credit reporting agencies to obtain.
- Everywhere else. Any other type of background information can be obtained from other sources, which include, but are not limited to public records, credit card institutions, collection agencies, and marketing databases. This information can sometimes prove to be stale, but nonetheless can be valuable information that is fed into credit reporting agencies.
What is gathered from these sources? Having sources is one thing, but getting something useful is a whole other issue. In this case, the useful information that is obtained can be trade payments, public record information, or collections information. This information serves as the backbone for creating a business credit report. That is why managing business finances in a timely and accurate fashion can be just as important, if not more so, than personal finances. Failure to obtain credit can be mean the end of some businesses, as many require credit influx to simply operate.
Is there a score? And if so, how is it calculated? Yes, there is a business credit score that is derived from information available on your business credit report. Like the personal credit score, there is a complex statistically based algorithm that calculates the business credit score. It attempts to take into consideration the factors that will help determine risk. In general terms, these are credit, public records, and demographic information. Credit is an obvious one. Things like number of trade experiences, outstanding balances, payment history, and percent of credit in use and many of the typical factors you will see in the personal credit score are in play here as well. Public records factor in liens, judgments, and bankruptcies. Finally, demographic information takes in to consideration the years on file, business size, and the Standard Industrial Classification (SIC) code.
Taking the time to familiarize yourself with the details of the business credit report and the business credit score can be an excellent tool for business longevity. Business owners throughout the country can benefit by simply paying attention to some small items like ensuring bills are being paid on time. This could have a long reaching impact on their business’ future.