Mind Your Commercial Credit Score

Too often small-business owners don’t keep track of their business credit reports, and most don’t know their commercial credit scores.

Yet it is more important than ever for small businesses to stay on top of their business credit data, experts say. Lenders, suppliers and other creditors are increasingly turning to that information to determine a small business’ risk, in addition to their traditional use of the owner’s consumer credit report.

Business credit reports include a company’s payment history and public record information, such as tax liens. A commercial or business credit score is based on the information in the report and is designed to give a quick read on how likely a company is to be late on its payments.

That’s important information for a lender or a credit manager, who, at a small company, is usually the owner. The sooner a creditor discovers a negative mark on a company’s credit report, the sooner it can take steps to manage or limit its financial exposure.

Interest in these small-business credit reports is soaring. Financial institutions, office-supply companies and other merchants traditionally have been hampered to a degree by the lack of credit information available on small companies.

To meet that demand, more credit bureaus have begun to offer commercial credit reports on small companies. Experian Inc. of Costa Mesa and Dun & Bradstreet of Short Hills, N.J., historically the main providers of business credit information, have created small-business databases in the last few years.

And major banks have banded together to form their own small-business credit information source, the Small Business Financial Exchange. The database is managed for them by Equifax Inc., the Atlanta-based powerhouse of consumer credit reporting.

The database has information on 22 million small businesses provided by the banks and other members. That information includes the businesses’ rapidly expanding use of credit cards. Equifax is working to increase the depth of information available on each business, such as leasing information and non-financial data.

“We want to provide more of a 360-degree view,” said Warren Beaty, senior vice president of North America commercial solutions at Equifax.

The growing quality of that view is appreciated by lenders, their small-business customers and small-business creditors who increasingly use a company’s commercial credit data as a risk-management tool.

“The information availability, quality and quantity have become much more robust, which is increasing the value we can provide to our customers,” said Jason Herman, senior vice president at Bank of America Corp.’s small-business risk solutions group.

Bank of America, a founding member of the Small Business Financial Exchange, will continue to pull consumer credit reports from a variety of sources based on the size of the loan a small business is requesting, he said.

Comerica Bank in Detroit, which is looking to aggressively expand its small-business lending, including micro-loans of $10,000 to $250,000 and traditional small-business loans of $1 million to $10 million, plans in the next six months or so to begin pulling commercial credit reports on some small-business borrowers too, a bank executive said.

“It’s just a different perspective on our borrower,” said Mike Conboy, executive vice president of the bank’s small-business lending group in California and Arizona.

Comerica also is considering making its new micro-loans of $50,000 or less tied to a borrower’s personal and business credit scores, he said.

The importance of commercial credit reports was further underscored this week by a study released Tuesday by Experian.

A four-year analysis of 50,000 companies randomly selected from an Experian database of 4 million businesses found that a credit score based on a combination of business and personal credit information was a more accurate predictor of the overall creditworthiness of a small business than either report alone.

And for all but the newest and smallest companies, a negative mark on a business’ commercial credit report was a more accurate indicator of a future problem at the company than a negative mark on the owner’s personal credit report, the study showed.

“Going forward, more banks will probably begin considering not just the borrower’s consumer credit but their business credit as well,” said Christine Barry, research director at Aite Group, a financial services consulting company in Boston.

In addition to payment history, a commercial or business credit report can include information on collection agency activity, bank and insurance data and public records such as tax liens, bankruptcies or other financial delinquencies.

Credit bureaus typically sell a range of business credit reports on a company. The reports, which can contain different degrees of detail, are sold individually by Experian and Dun & Bradstreet, as well as through databases to which companies can subscribe. The Equifax small-business database is available only to members.

Commercial credit scores based on business credit information also are sold by credit bureaus. The scores are designed to predict payment delinquency of 90 days or more.

Experian also sells a small-business credit score that is based on combined personal and business credit information.

Access to the business scores and reports is becoming more widely available. Experian, for example, is working with large companies to place its business credit reports on their corporate networks for use by employees, said Dan Meder, senior director of Experian’s commercial credit risk solutions group.

For example, Fireman’s Fund Insurance Co. of Novato, Calif., said last year that it would offer Experian’s Web-based business credit reports at a lower price to its customers through its own website.

Customers already can buy the reports at Experian’s website for $8 to $44.95 each, depending on the amount of information the reports contain.

The reports also are available as part of the downloadable version of Microsoft Office software. Users can buy the reports without leaving the Office application.

Lenders aren’t the only ones checking your commercial credit status. Credit managers at your suppliers, subcontractors, potential partners and even your customers probably will want a look at your commercial credit history.

“Let’s face it, those reports -- that’s your face to the world,” Experian’s Meder said. “It’s very important as a business owner that you are aware of what is in your report.”

Cyndia Zwahlen can be reached at cyndia.zwahlen@ latimes.com.

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Synopsis

Commercial or business credit reports can include the following information:

* Credit scores

* Banking, insurance, leasing and payment history and collection data

* Public record data including tax liens, legal judgments, business registrations, bankruptcy filings and Uniform Commercial Code (UCC) filings

Source: Experian

Los Angeles Times