What’s a Business Credit Report and Why You Should Care

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Depending on your own personal experience, this business credit report story might sound all too familiar. A business owner goes to a bank to request a business loan, which is rejected quicker than the ink dries on the application.

Why? Because the bank checked the company’s credit by going to at least one of the major credit bureaus and researching the business’ credit score. But, wait, the business hadn’t requested a credit report for itself. That’s right. But, these guys don’t just serve the business owners, they also provide credit ratings to third parties. In order to grow their businesses, the credit bureaus are always growing their databases.

Business credit report. Hmm… it sounds serious, doesn’t it? It almost brings you back to the days of getting a report card. (For any junior entrepreneurs or entrepreneurs in training, please adjust this phrase accordingly.)

In all reality, your credit report is a tool that you can use to measure the health of your business, most specifically, in terms of how creditworthy you are in the eyes of third parties, like banks and vendors.

The minute you start talking about business credit reports, the conversation will quickly swing to the topic of credit scores. Here’s how they’re related: A credit report is a document that contains the credit score.

Going back to comparing a business credit report to a report card, your credit score is like your total grade point average, it’s the measure that sums up all the different things (key performance indicators or KPIs in business-speak) that are taken into account in to how well you’ve managed your company’s performance in terms of securing funding and paying debts.

Just like test scores, business credit scores usually are recorded on a numerical or grade scale. The lower your score or letter grade, the riskier you appear. The higher your score or letter grade, the more universities want to recruit you and possibly give you a scholarship.

But, you know what? Those honor students only tell part of the story. There’s a range of learning styles and a range of business experiences and a low credit score doesn’t have to be the end of the world or your business. It simply gives you a perspective on where you’re staring and the specific obstacles you have to face in order to promote your strengths and your creditworthiness.

Remember, Bill Gates and Steve Jobs both dropped out of college.

The factors that affect a business credit score

One of the current challenges with business credit reports is that there isn’t a single, uniform standard or algorithm for determining the actual credit score. It’s true —  it’s 2018 and there’s no prevailing benchmark.

Current methods for building business credit reports focus predominantly on liabilities, like business loans, credit cards and collections. What’s missing is a comprehensive view of both assets and liabilities.

As a result, there’s a chance that a company can be unfairly cast in a negative light — depending on the KPIs used in calculating the credit score.

Consider a business that has several outstanding invoices from some of its most dependable customers. While this business will most likely have these funds in the near future, in the meantime it might be seen as a credit risk based on these liabilities. Despite the likelihood that these invoices will be paid.

If their credit score took their proven track record with a reliable vendor into account, this company would be less likely to be seen as a risk. But, right now, this aspect of accounts receivable isn’t taken into account by traditional business credit report calculations.

In another instance, a company has an outdated collections notice referenced in their credit file. Even though the company has resolved the outstanding debt, the negative information is there until a successful appeal process leads to the removal of this data.

Each of these business owners has worked incredibly hard to build their business — only to hit a crossroads created by inadequate or inaccurate information in their business credit reports.

What ForwardAI is doing differently

Through our free analytics and insights, you will receive a risk score that gives you an indicator of your overall financial health. Your risk score also gives you a better idea of how other businesses and third parties and might view you.

By including variables that many other rating services leave out, like how many customers you added in the last 30 to 60 days, how many repeat customers you have and the average lifespan of your customers, we’re able to give you a more complete view of how others might evaluate you in terms of risk.

Your assessment will also help you better understand your cash flow and provides insights on how to build on your strengths and conquer your weaknesses.

Getting started is as easy as connecting your QuickBooks Online account to ForwardAI Predict.* Then all you have to do is run an assessment, using the current data you’ve worked so hard to build and maintain in your accounting system.

The current business credit score landscape 

The scores and reports that old-fashioned legacy players offer are parts of much larger enterprise-level solutions. Each of these players also sells these indicators to third parties, so that these third parties can determine which businesses represent the highest and lowest levels of risk.

Earlier in this article, we mentioned that there’s no standardized method for creating a business credit report and calculating the resulting credit score. Each of the top three credit bureaus gathers data from banks, vendors, trade associations and credit card companies — information that is also verified by third parties.

Because these details are sourced and validated through third parties, there’s a greater likelihood that these reports can contain inaccuracies or mistakes. (Another reason why companies should routinely check and monitor their credit ratings.)

In fact, a Wall Street Journal survey found that nearly 25% of businesses who check their credit reports find errors or missing data that lowered their scores.

On top of this, a National Small Business Association (NSBA) survey found that 23% of businesses had a hard time trying to fix mistakes on their credit reports — meaning that efficient reporting tools are more than necessary ever before for businesses to thrive.

Which information is used most often to calculate a business credit score?

As there’s no “gold standard” — here are some of the factors that are often taken into consideration when generating a business credit score:

  • The company’s size — Newer, smaller businesses will have fewer cash reserves and a shorter track record.
  • The industry in which the business operates and the associated risks with this industry — some industries with higher risk are actually blacklisted by conventional sources.
  • Borrowing history — how often the business has used financing before, including how much was borrowed and how quickly it was paid.
    • Current levels of outstanding debt are also examined — including credit card usage.
  • Public and court records — business credit bureaus will look to see if there are records of bankruptcies, lawsuits and other liabilities.

Again, this is only a short list of variables. Did you know that there can be as many as 800 different pieces of information that go into the calculation of a standard business credit score?

How is a business credit score used?

While it may seem obvious that a business credit report and its corresponding credit score is used to help a company access financing, there are also lesser-known uses. For instance, a solid business credit rating can help a company secure better insurance rates and negotiate more favorable payment terms with vendors, suppliers and other third parties.

Additionally, having a credit score for your business is another way to show that a company’s finances are separate from the owner’s personal finances. This adds further credibility in terms of best practices and makes tax time a lot easier.

What’s the difference between a business credit report and a credit score?

We’ve alluded to this throughout the article, but now we’ll take a moment to spell it out. A business credit report (business credit file) is an assessment, based on several KPIs. A business credit score is a KPI included in the report. It’s the hero or the cool kid of the entire analysis.

In general, the established providers will let you search or even request your business credit score for free. But, they almost always charge for a full report. Sometimes you can take advantage of a promotional offer, but in most cases, you can expect to pay.

While a credit score is a helpful business metric, it’s not the only KPI you need to know. A free business assessment from ForwardAI Predict lets you build a visual, easy-to-follow report created from the data you already have in your current accounting software.*

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.