Commercial Collections Blog

The Effect of Debt on Business Credit

Just about any business owner would probably be aware of how personal credit works, and how they can find out their credit score. Some new business owners may also suppose that their personal credit is what they should use when they need extra money to grow their business.

At first, it might be so, but later on it’s better for the company to have its own credit in good condition. In fact, personal credit is a bit different from business credit. Although personal credit is especially important to maintain during the beginning stages of a business’ startup phase, the differences can have a major impact on the ability of a business to secure financing at reasonable rates.

The Effect of Debt on Business Credit

Let’s take a closer look at what some of those differences are, and the effects they can have.

  1. Business Credit Scores are Determined Differently

Business credit scores can come from consumer credit reporting agencies like Experian and Equifax, but also from some lesser-known firms like Fair Isaac Corporation (FICO), and Dun and Bradstreet (D&B).

Each of those firms uses a different scale and criteria to determine their score. Good scores with D&B and Experian, for example, start around 75 and 80 respectively out of 100, but FICO scores start looking nice at around 140 out of 300.

For businesses, these firms don’t just take into account the credit history of the business, including payment times, balances, and the like. They can also include factors like the risks carried by the entire industry the business is a part of, and compare them to the size of the business and the market demand for its products. They may also even compile different scores in consideration of different conditions like whether a given business is likely to remain solvent.

Regulations surrounding business credit scores are also different than those for personal consumer credit. Agencies don’t need permission to have access to a business credit score, but they almost always have to pay for it. Not even the company owner can get their business credit report for free, in most cases.

  1. Business Credit Scores are Less Reliable

This has a lot to do with how the credit reporting firms identify businesses on their records: by company name and street address. In areas where similarly-named companies in the same industry exist on the same street, confusion may ensue.

The result is that whereas about 20% of individuals are likely to find at least one error on their consumer credit report, the probability increases to as much as 25% for business credit reports.

To make matters worse, a business’ lenders and suppliers aren’t required to report payments to credit reporting firms. Although many do anyway, there’s a huge potential for credit report information to not only be wrong but missing outright.

The solution is relatively simple, and it’s the same as with consumer credit; each business must work directly with the reporting firm in order to get errors rectified.

  1. How to Leverage Business Debt for a Better Credit Score

Now, here’s the fun part! Once a company gets all of those errors squared away (at least as much as possible), it can start using it’s existing, standing debts to improve its score and get even better financing.

In fact, it’s best to start playing this game quickly. As creditkarma.com recommends, “It’s better to have a record to show than [to] have to scramble at the last minute when you need financing. Regardless of the business’s or your personal credit score, some lenders like to see that a business has been running for at least two years.”

Additional steps to take include getting an EIN number from the IRS for tax purposes, business banking accounts, and even dedicated telephone lines.

It’s also good to obtain a DUNS number from D&B, which will allow the company to bid on lucrative and reliable (read: credit-friendly) big corporate and government contracts. This is an important part of the process to secure financing from the Small Business Association, as well.

Once all of that is set up, creditkarma.com makes some further specific suggestions:

“From there, you should consider establishing and using business credit accounts. These accounts can include: a business credit card, accounts with office supply stores, a gas card, [and] lines of credit from suppliers. Even a $500 vendor credit that needs to be paid within a week could be used to establish a track record of on-time payments. When you are contemplating which suppliers and lenders to partner with, ask them whether they do or can report activity to the business credit bureaus. If you already have suppliers or lenders who refuse to report your activity, you may even consider switching.” How to build a good business credit score | Credit Karma, https://www.creditkarma.com/article/building-your-business-credit-score-114152 (accessed April 04, 2017).

That’s the name of the business credit game. Do everything possible to stabilize and accurately report all credit history. The dividends include easier access to future credit, and even rendering it unnecessary to rely on personal credit.

We hope that you find these business credit suggestions valuable and that you incorporate them into your business practices. Remember, when you have debt collection issues and need someone on your side, or maybe you want a better understanding of how you can recover bad debts, know that Burt and Associates is your go-to expert. Please feel free to contact us today through our website, email, or by phone. Our representatives are available to help you today.