A credit report is a factual report generated by various reporting agencies that collate credit data on specific persons and evaluate the risk associated with granting credit to that person as a potential borrower. Whether for a consumer or a business, it is essentially the same thing; however, many differences exist between them. Evaluating a consumer’s credit worthiness is based on the FICA (Fair Isaac Company) score and it is the company that developed the formula that calculates different values based on specific factors such as income, credit history, length of credit history, current debt, and others.
Business Credit Evaluating Factors
While these and other factors are the same ones used for evaluating a business’ credit worthiness, a business’ complexity makes the situation more difficult to determine and is the reason why some agencies specialize in evaluating a business’ credit worthiness. In many cases, these agencies specialize in specific aspect of business activities or specific types of businesses. For evaluating a consumer’s credit worthiness, only the FICA scoring system exists; however, for businesses, several different scoring systems exist in addition to individual business credit agencies having their own scoring systems.
Like consumers, businesses operate with the same basic principles of income, debt and reliability; however, that is where the similarities end. A business with an excellent credit history may not be given a high score for a long-term loan due to the nature of what that business does. For example, it may be involved in a risky business model, such as speculative oil drilling or do business in another highly volatile market. As a result, the prospects of the business being able to sustain long-term payments is less likely. This is known as industry risk and is based on NAICS (North American Industry Classification System) or SIC (Standard Industrial Classification) business classification codes. The NAICS and SIC codes use a numeric classification system for different industries such as manufacturing or retailing business. Examples of high risk Business classifications include Adult Entertainment, Dry Cleaning, and Debt Collection, among others.
Long-Term Debt Factors
Another example of a specialized business credit report factor is long-term debt. Business have a number of different types of long-term debt while consumers generally only have one; mortgages. A company operating in high-risk industries may have a good rating for short-term debt or credit card risk, but score poorly for long-term debt due to the risk that that company may go out of business in the future. Another, less obvious factor is checking account activity. This is less a function of the company’s balance or payment as it is of the checks that they take in and the frequency of problems and mishandled accounting. This can be an important factor to consider when a bank is asked to open a checking account for a business. There are also credit limit scores that are used to decide the amount of credit that is safe to grant a business. A small company may be given a high score based on a recently granted patent considered potential valuable. While these are only a few of the many factors considered in evaluating a business credit report, they are probably the most important.
Business Credit Report Agencies
The same agencies that track and evaluate consumer credit also evaluate business credit, although not in the same ways; other agencies provide credit reporting services specifically for business credit reports. One of the better known is Dun and Bradstreet. This agency is a general information services and while they are used to evaluate a business’ credit worthiness, the information is also used by other businesses to evaluate whether to sell to the given business or sign a long-term contract with them or not. Dun and Bradstreet maintains two credit scoring systems, Paydex and the credit limitation score. Paydex is their version of the consumer’s FICA score and the credit limitation score is used to evaluate the risk of lending and considered the more important of the two.
Other Agencies
An agency focused on a specific aspect of the business credit report is Paynet. Paynet deals strictly with long-term debt information derived from United States lenders. The company maintains information databases on commercial loans and leasing activities. The Chexsystems agency is a service used by banks to watch and test a business’ checking account activities. When a business seeks to open a checking account, the bank will most likely ask for a report from this agency first to make sure of that business’ reliability. There are other agencies less well-known, but very important to businesses when dealing with other businesses or seeking loans.
Often small businesses are lax in keeping up with their credit report profiles because the cost of membership can be steep or the time and expertise needed to check the information is available. Companies offering business credit report management services also exist and can help in improving credit report scoring and the firm’s public image, which is an all important factor. Referred to as business credit management services, they not only aid in improving the firms own credit rating, but they also advise on potential business partners and clients to prevent fraud or high-risk ventures that can damage a business’ credit report in the future.
