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Why And How To Generate Business Credit Reports

Credit reports are as indispensable to businesses as they are to individuals. Although with a few differences, these reports work similarly to the ones you submit to make a big-ticket purchase or apply for a personal loan. These reports inform lenders and investors how likely they’ll get their money back or their money’s worth if they invest in the business.

These documents become more crucial in a startup’s eyes, considering it needs every cent it can borrow to grow. Lack of funding is one of the common reasons small businesses fail within the first decade. Imagine running out of money at a critical juncture, unable to ask for a loan due to a lack of a business credit report.

With more small businesses poised to open and thrive this year, it’s a good time to learn about business credit reports and the why and how.

What Are The Differences?

Business credit reports differ from their consumer counterparts in three aspects. First, whereas consumer credit is tied to the owner’s Social Security Number (SSN), business credit is tied to the business’ Employer Identification Number (EIN).

Unlike an SSN, an EIN isn’t a strict requirement for opening and running a business. That said, the Internal Revenue Service (IRS) stresses that it’s a requirement if a business meets any of the following conditions:

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  • Employs individuals
  • Registered as a corporation or partnership
  • Files tax returns for alcohol, employment, excise, firearms, and tobacco
  • Withholds taxes on non-wage income paid to a non-resident individual
  • Manages a Keogh plan (tax-deferred retirement plan)
  • Involved with trusts, nonprofits, farmers’ cooperatives, or other organizations

Even when an EIN isn’t required, such as with a sole proprietor, getting one is nevertheless a good idea. Business credit reporting agencies (more on them later) run credit searches through the business’ EIN; without it, they can’t assess its credit history.

Second, business credit reports use a different scoring system from consumer ones. They gauge creditworthiness on a scale of 0 to 100, different from the 300 to 850 in consumer credit reports. One exception is the FICO Small Business Scoring Service (SBSS), which uses a scale of 0 to 300 and is required to apply for Small Business Administration (SBA) loans, namely 7(a) loans.

Lastly, the Big Three business credit reporting agencies differ slightly. You’re probably familiar with the three major reporting agencies for consumer credit: Equifax, Experian, and TransUnion. In this case, TransUnion is replaced with Dun & Bradstreet (though TransUnion also provides business credit reporting services).

Each agency has its own criteria for determining low, medium, and high risk. Dun & Bradstreet’s PAYDEX scoring system is easy to understand: 80 to 100 is low risk, 50 to 79 is medium risk, and 0 to 49 is high risk. Meanwhile, Experian’s Intelliscore Plus classifies businesses into five risk categories: low, low-to-medium, medium, medium-to-high, and high.

On the other hand, the SBA sets minimum SBSS scores for its programs. For example, a 7(a) loan requires a score of no less than 155. As a rule of thumb, most SBA lenders require business clients to have an SBSS score of at least 160.

Why Get Business Credit

As mentioned earlier, the need for more capital can nip promising ventures in the bud. According to industry experts, it has been a problem for decades and will likely remain as world economies are still reeling from the pandemic.

A report by the National Small Business Association (NSBA) found that almost half of small businesses struggle to search, let alone qualify, for sufficient funding. Those who managed to secure loans sometimes found themselves paying their dues earlier than initially agreed upon.

The result is a vicious cycle: businesses lose money when needed, can’t afford to improve their operations, fail to make enough, fail to pay back their dues, and have their credit score slashed. They might not even notice that their credit score has dropped, making creditors less inclined to qualify them for further loans.

These score drops are often a result of hard inquiries, also known as ‘hard pulls.’ These happen when lenders or creditors perform a background credit check as part of an application process. While experts say a hard pull usually results in a deduction of a few points, they also say hard pulls can add up fast when applying for multiple loans.

You’d want a soft inquiry or ‘soft pull,’ wherein lenders or creditors check your business credit, usually to determine if it qualifies for special loan offers. Soft pull credit reporting doesn’t affect credit scores because it involves no application. Self-checking is also considered a soft pull.

Checking your credit is essential if you don’t want to fall into this pitfall. Credit reports vary by format, but most include the score and, more importantly, a summary of the factors contributing to said score. The reports can also help find discrepancies, allowing business owners to dispute these with the reporting agency.

If your business is on the high-risk side, settling your dues on time and in full is your best bet. Creditors are more confident about lending capital to companies that won’t waste their money. Experts advise keeping your debt-to-credit ratio under 15% at all times, so your periodic debt shouldn’t be more than 15% of the total credit limit available.

Increasing the credit limit is another option, but spending more becomes more tempting. Such an image won’t sit too well with creditors who now believe the business will only increase spending with every application to increase the limit.

How To Generate Reports

As with getting consumer credit reports from the Big Three, it’s also vital to request a business credit report from its own Big Three. However, the process isn’t as straightforward as getting consumer credit reports.

  • Equifax

Unlike consumer reports, which people can get from a particular federally-mandated website, requesting a business credit report from Equifax entails getting in touch with a representative from the agency. It’ll only provide the report to the registered business owner and only if the owner is in the middle of applying for business credit.

Sometimes, a valid request doesn’t guarantee that Equifax has a report ready. It stresses that a business must have an established tradeline to have a report on file. Qualifying for a loan will be frustrating without it.

Equifax reports are arguably the priciest among the Big Three, with a single report costing around USD$100. Then again, you’ll get a comprehensive review of your business’ credit health, comprising the credit score (known as a payment index) and two other scores.

The first is the credit risk score, which gauges a business’ likelihood of paying back the lender or creditor relative to its financial stability. The score ranges from 101 to 992, with 556 acceptable to most creditors. A score of zero means the business is bankrupt.

The second is the failure risk score which determines the business’s likelihood of folding within the next 12 months based on commercial data and legal records. The score ranges from 1,000 to 1,880. There’s no agreed-upon bare minimum failure risk score, but a lower score implies that the business has a higher risk of closing.

  • Experian

Experian’s process is more manageable, which requires the business owner to use the website SmartBusinessReports.com. The search is free, but retrieving a copy requires a fee; a typical credit report starts at USD$40, with a more comprehensive report at USD$50.

Fortunately, Experian offers a way to provide a complimentary report to businesses, though it only applies to those who have been denied credit within the past 60 days. It requires writing a request letter to Experian and attaching a copy of the notification letter from the lender or creditor who denied the credit application. The letter must also include other details, such as:

  • The business’ registered complete name
  • Any alternative or ‘doing business as’ names in the past decade
  • Current physical address and P.O. Box
  • Any past physical addresses and P.O. Boxes in the past decade
  • The denying creditor’s name and address
  • Explanation for the creditor’s denial
  • References to an Experian report being the basis for the denial
  • The business owner’s (or any authorized representative’s) signature

Email the letter to Experian’s commercial relations division at rfr@experian.com or mail it to its North American office in Costa Mesa, California. The company will send an access code and instructions on accessing the report online after at least two business days.

  • Dun & Bradstreet

Dun & Bradstreet maintains its identification system called the Data Universal Numbering System (D-U-N-S). Created in 1963, the nine-digit D-U-N-S Number works like an EIN (but shouldn’t be confused with the latter) but is intended for collating and managing information about a company. Applying for a D-U-N-S Number happens separately from an EIN.

Nevertheless, these numbers are necessary to request business credit reports from Dun & Bradstreet. The good thing is that you can sign up for both numbers free of charge.

It’ll also prompt you to create a free CreditSignal account, which can display four of its many metrics for two weeks, one of which is the PAYDEX. Once the free period has passed, you’ll be prompted to upgrade to any of their paid plans. Fortunately, these plans feature real-time credit monitoring for a business-friendly price.

It isn’t unusual for these reporting agencies to share credit reporting data. This fact can help you cross-reference information from one report to another for discrepancies, all the more reason to get reports from all three.

Conclusion

Credit scores can make or break a business’ growth moving forward, especially a startup which capital is limited. Requesting detailed credit reports from the Big Three can aid business owners in making financially-sound decisions, among other things. Their hefty price tags don’t compare with the potential success they can help a startup achieve.

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