Building business credit is both highly misunderstood and becoming more and more important all the time for business owners.
Consider this. In the business credit reporting space, there are the big 3 who sell business credit reports, Dun & Bradstreet, Equifax Commercial and Experian Business Credit. In the first 6 months of 2013, according to Nav, D & B had 45 million business credit report requests and Equifax Commercial had 35 million. I do not have data on Experian Business Credit.
I have heard some people say that building business credit doesn’t matter. I say, then why are a lot of business credit reports being pulled if business credit doesn’t matter?
According to the Small Business Credit Survey from 12 Federal Reserve banks across the country, 61 percent of employer firms faced a financial challenge over the past year. And not being able to access business financing was chief among them. The world is changing. I agree that 10 years ago business credit didn’t matter too much. But today, it does clearly matter.
Suppliers pull business credit on manufacturers to know that they pay their bills. Manufacturers pull business credit on suppliers to know they are dependable and reliable. Retailers and distributors often pull business credit to decide if they will issue trade credit to you when you want to purchase their products or services. The business credit report will likely influence the amount of credit granted and also the terms.
Trade Credit is a Common Form of Business Credit
It used to be that Harry’s Plumbing Supply Company would let Joe from Joe The Plumber Inc. take $5,000 worth of plumbing supplies to get his job done over at the local high school. Harry knew Joe was good for it so he issued an invoice, usually with Net 30 terms, and then trusted Joe to get it repaid in “about 30 days.”
That’s a great thing but it’s also not a very “scalable” model. Harry can’t meet everyone and give a handshake deal to them if he wants to have 10,000 or 100,000 customers.
Enter business credit. Now, places like Dell, Staples and Home Depot, among many others, can pull a business credit report and score. This shows the repayment history and behavior of each company and make a data-driven decision on whether to extend credit to that company or not. It’s not only scalable, but would you rather make your credit decisions with data to support it or do you want to always depend on your hunch? I think I’m pretty good at reading people, but I’ll go with the data option myself.
That may be a simplified version of how business credit works, but it’s only going to continue to grow. In fact, one of the more popular business credit scoring models is the FICO LiquidCredit Score. Fair Isaac Company, where we get the term FICO, has long been the dominant player in the credit scoring and risk assessment space for lenders. With their FICO LiquidCredit Scores they combine data from a variety of sources (including the big 3 business credit bureaus and the personal credit of the business owner applying for the credit) and issue a score to lenders that ranges from 0 to 300.
Still Not Sure About the Importance of Building Business Credit?
Consider this. As of 2012, the SBA requires all SBA 7(a) loans of $350,000 and under to use the FICO LiquidCredit reports as part of their loan approval process. Currently, the SBA requires a minimum score of 140 although that number could change and adjust over time. A Boefly.com analysis of previous years loan data suggests that this new rule requiring the business FICO scores would impact approximately 33,000 loans, based on last years volume.
These have been the “secret scores” being used by lenders for the past several years. Large banks like PNC Bank, Huntington National Bank, Sovereign Bank and Zions Bank have been using FICO LiquidCredit Scores as have many smaller regional banks like Associated Bank, Bank of Idaho and Union Bank of California. Those are only a small number of lenders using the FICO business scores.
The problem has long been that there was no way for a business owner to know how he “ranked” on this “secret score” because the reports were not available at the consumer level. I can’t go out today and decide to buy my company’s FICO LiquidCredit Score. Fortunately, that’s about to change. I expect others to follow, but the first to offer this report to business owners was Nav when they made it available early in 2014, according to a press release. They are still the only provider of the score, via their Premium Plus plan ($49.99/month).
Building business credit, a portfolio, should be something that business owners look to do. It can become an asset for your company if you are building your business to sell it. Clearly, good business credit alone should matter to buyers and make the business more attractive. I realize this is probably not something that has mattered in the past but, again, things have changed as it relates to small business lending and this is an area that should no longer be ignored or neglected.
Additionally, if a business has existing funding or business lines of credit that do not have personal guarantees attached to them, then those are often transferable to new ownership. It is important to note that, in most circumstances, these transferable lines of credit – if you’re a small business owner with revenues under $10 million per year — are normally NOT going to be your “cash” lines of credit since those are normally always going to have Personal Guarantees associated with them. The transferable business lines of credit, if they were properly established, will normally be established lines at places like Staples, Office Depot, Dell Computers, Home Depot or a fuel line of credit at places like Shell, Exxon, etc.
Even before you need to leverage it, building business credit is important. A 2015 Nav study found that business owners who understand their business credit are 41% more likely to get approved for a business loan. Building your credit before you actually need funding ensures that you’re ready when opportunities present themselves. You don’t want to miss out on major opportunities like getting your products onto Walmart shelves or landing a large government contract because you can’t access the capital you need quickly. Most of your options for large-dollar, long-term and low-cost financing will look at your business credit, as well as some alternative lenders like Funding Circle. And according to Nav, it can take up to six months to start building a credit profile with one of the major business credit bureaus. So building business credit before you’re ready gives you a better chance of being able to leverage those opportunities for growth, not just reach to crises.
One Last Caution
Beware of some of the sales tactics used by companies and individuals who sell “business credit building” programs and services. I do think this is hard to do without some professional assistance but check out whoever you work with closely. When I started my company, I hired someone to help us build our business credit. We provide working capital to companies and I wanted to have good business credit but I knew enough about business credit that I knew I didn’t want to try it myself.
Many people in the business credit building space “over sell” or exaggerate the benefits. Do your due diligence:
- See how long they’ve been in business.
- Check out their Better Business Bureau rating.
- Look at their website, does it have clear contact information so you know where the business is physically located?
- Does the owner or leadership team share who they are and perhaps have bio’s on their website?
- Are they active on social media?
Do business with someone you can trust, who has experience, who is accessible and who isn’t a faceless, nameless person behind a well designed website.
Lastly, consider the alternative of not building business credit. Do you want your business to either have bad business credit or no business credit? It matters now more than ever that you have a good business credit profile and report. Eighty million business credit pulls from two bureaus in just 6 months is not something to ignore.
What impression are you giving people when a manufacturer, a supplier, a distributor, a retailer or a lender looks up your business credit prior to working with you or to decide if they should work with you — and they find nothing? Is that the impression you want to send others about your business and your brand?
Credit Photo via Shutterstock