Table of Contents. 4 What Are Business Credit Scores? 8 How Business Credit Can Affect a Business Steps to Establishing Business Credit

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2 Table of Contents 4 What Are Business Credit Scores? 8 How Business Credit Can Affect a Business 10 6 Steps to Establishing Business Credit 12 Can Business Owners Build Business Credit Fast? 14 How Business Owners Can Use Business Credit to Protect Their Business From Fraud 2

3 Intro As the trusted advisor to business owners, clients expect their accountants to be knowledgeable about the process of business financing. Entrepreneurs often go about the process of financing their business aimlessly without understanding the difference between personal credit and business credit. Business owners don t always separate their personal and business finances, sometimes relying on personal funds and personal credit cards to get going, eating up their credit utilization and lowering their personal credit scores. Since your clients will look to you, their accountant, for guidance, it is important that you too understand how business credit scores are established. Many professionals are familiar with personal credit scores, but lack the general understanding of how business credit scores are determined. To help you protect your clients personal & business credit, as well as reap the benefits of increased business credibility, we are providing you with this business credit guide. Nav s American Dream Gap Report was a survey we conducted last year of small business owners on their understanding of business credit. We found that 45% of business owners don t know they have a business credit score, 72% don t know how to find information about their business credit, and 82% don t know how to interpret their score. Yet businesses who understood their business s credit were 41% more likely to get approved for a loan. Talk about a competitive advantage! In this Business Credit Guide, we ll run through the basics of business credit so you can help your business clients increase their financial health. As you ll see, business credit reports and scores can affect many areas of a business, so even if your clients aren t looking for financing now, getting their business credit in shape can make a significant difference in the future of their business. 3

4 What Are Business Credit Scores? Often, from the time you get your first credit account, you begin to build a personal credit profile. As you apply for credit cards, sign a mortgage agreement, move to different addresses, and make a life for yourself, your credit profile grows alongside you, and your credit scores will play an increasingly important role in your financial future. Like personal credit, businesses have their own scores too, and these scores paint a picture of a business s ability to repay a debt. Both types of scores, personal and business, can be taken into account by lenders to qualify a business for trade credit and government contracts. A business s credit report can affect the interest they ll pay on SBA and bank loans, lines of credit, and even business insurance rates. And here s a crazy fact: Suppliers, vendors, and even business partners can look up a business s credit information anytime they want, without notifying the business and without their permission. So you ll want to help your business clients understand how these reports work. Factors that determine business credit scores A business s credit scores are calculated from various traits about the company and its financial history, including: Payment history Length of credit history Outstanding debts Credit utilization Public records, such as bankruptcies, liens and judgments Company size Industry risk Notice that while most of the factors are similar to those used to calculate personal credit scores, others are unique to business credit scores. Some business credit scores, such as the FICO LiquidCredit Small Business Scoring Service SM and Experian s Intelliscore Plus SM can also take into account the personal credit of a business proprietors. 4

5 The different business credit scores and reporting bureaus The three main business credit scores are: Intelliscore Plus SM from Experian Dun & Bradstreet s PAYDEX Score FICO LiquidCredit Small Business Scoring Service (FICO SBSS) Establishing good business credit is often a confusing process because not all creditors report to all major business credit reporting agencies. For example, information about a business s equipment lease may show up in a database called PayNet, while information about business credit cards is often shared with commercial credit agencies via the Small Business Financial Exchange (SBFE). The Intelliscore Plus SM from Experian According to Experian, Intelliscore Plus is a statistically based credit-risk score that can combine business and proprietor credit data to predict the likelihood of serious delinquency in the next 12 months. Score range from 1 to 100, where lower scores indicate higher risk. Risk is very low in the first two risk classes, risk class 3 is average, and classes 4 and 5 present above-average risk levels. The Intelliscore Plus is regarded in the credit industry as quite predictive and economical. It incorporates statistical modeling using over 800 commercial and owner variables including tradeline and collection information, recent credit inquiries, public filings, new account activity, key financial ratios and other performance indicators. 5

6 The Dun & Bradstreet (D&B) PAYDEX Score According to D&B, the PAYDEX is a unique, dollar weighted indicator of a business s payment performance based on the total number of payment experiences in Dun & Bradstreet s file. The Dun & Bradstreet PAYDEX ranges from 1 to 100, with higher scores indicating better payment performance. The PAYDEX score is different from The Intelliscore Plus because payment history is the ONLY factor that affect the score. If you look at a business credit report from Dun & Bradstreet, you ll see other factors listed on the report, such as credit utilization and derogatory marks, but these won t influence this score. PAYDEX is primarily used by vendors and suppliers to judge a business when determining what terms to extend on trade credit (e.g., net 30, net 60, etc.) Typically, the better the score, the more generous the terms extended Payment comes over 120 days beyond terms Payment comes 120 days beyond terms Payment comes 90 days beyond terms Payment comes 60 days beyond terms Payment comes 30 days beyond terms Payment comes 22 days beyond terms Payment comes 15 days beyond terms Payment comes on terms Payment comes 20 days sooner than terms Payment comes 30 days sooner than terms

7 FICO SBSS score FICO s Small Business Scoring Service (SBSS) rank-orders applicants by their likelihood of making payments on time. The score ranges from 0 to 300. The higher the score, the better. The scoring is typically based upon personal AND business credit history as well as other financial information, though the specific sources of information may vary. A strong history of business credit with timely payments to vendors and suppliers may help boost a business s SBSS score. The FICO SBSS score is used by lenders to evaluate applicants for term loans and lines of credit. The Small Business Administration (SBA) uses the FICO SBSS score to evaluate applicants for their most popular loan program, the 7(a) loan program. The minimum score to pass the SBA s pre-screen process is currently 140, but most banks and SBA loan providers set their minimum score at

8 How Business Credit Can Affect a Business Now you have a solid foundation of what business credit scores are, but what s really important is how they will affect the business of your clients. A strong business credit score will boost a business s chances of: 1. Securing the best rates on a loan. Banks and online lenders can use business credit scores to prequalify a business for a loan. If your clients are considering applying for an SBA 7(a) loan of $350,000 or less, for example, they are required to have a minimum FICO LiquidCredit SBSS score of 140 (out of 300), and most lenders are looking for a 160 or higher. They ll often dig deeper into the meat of the business credit report to determine the likelihood that a business will pay back the loan, which can have an affect on both interest rates and size of the loan offered. 2. Securing the best trade terms with suppliers. Businesses with higher business credit scores are often extended better payment terms from vendors and suppliers, such as net-60 or net-90 day terms. Businesses with lower scores might be required to pay on delivery or even prepay. 3. Securing lower commercial insurance premiums. Commercial insurance providers may consider a company s credit report as part of the quote process. According to the insurance industry, companies with poor credit pose a higher risk of filing claims. They ll look at factors such as payment history and any collections to determine your rate. 4. Winning business contracts with large companies or the government. If your clients want to do business with the government or large companies, chances are they will need to meet a required minimum business credit score. For example, Walmart suppliers need to have a minimum PAYDEX score of 80. 8

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10 6 Steps to Establishing Business Credit Much like launching a business takes some planning and coordination, establishing and building credit takes time and effort; it won t happen overnight. You can help your business clients get started with these steps. Nav s offers a free BusinessLauncher tool that guides businesses through the essential steps of establishing and building their business credit profile. You can learn more about this tool in our Getting Started with Nav video. Sign up to see it for free in Nav s Accounting Professional Advisor Program. 1. Ensure The Business Exists Your clients can t effectively establish credit until the business credit reporting agencies know they exist! Fortunately, this step involves similar tasks that a business would take to make tax time smoother, such as: Obtain an EIN (federal tax identification number). Open a bank account in the official (legal) name of the business. 2. Pay On Time All the Time This is probably the number one rule in any credit situation. Paying bills on time shows that a business is reliable and can effectively manage (and pay off) debt. Late payments, especially severely delinquent ones, will bring down credit scores and negatively impact business credit profiles. 3. Establish and Maintain Good Credit Relationships with Suppliers and Vendors In the world of business, a solid line of credit with industry relevant vendors is like gold. The better the relationship with suppliers, the more likely a business is to avoid prepaying for items or services. If your clients can work with a handful (3 5) vendors or suppliers, they ll efficiently establish a positive line of credit. Not all vendors and suppliers report payment activity to business credit reporting agencies or databases encourage your business clients to ask their vendors if they report or direct them to Nav s free Business Launcher tool, which lists vendors that report.. 10

11 4. Open a Business Credit Card Opening a business credit card with a company that reports to the major credit reporting agencies is a great way to establish business credit. Business credit cards offer a relatively low cost way to finance business purchases, and many cards offer some sweet rewards. 5. Transition Commercial Expenses Away from Personal Finances Given the steps above, this is fairly redundant, but none the less important. By opening credit cards, lines of credit, and bank accounts in the business s legal name, your clients will be separating their expenses from that of the business. As you already know, helping them incorporate is a good step too. An LLC, S Corp, C Corp or similar business entity is far preferable to a sole proprietorship when it comes to building business credit. 6. Monitor Business & Personal Credit 25% of small business owners have reported significant errors on their credit reports. Business who diligently monitor their business credit history will spot inaccuracies before they become a problem. Nav s free Disputes tool helps businesses easily identify any potential errors in their personal and business credit reports, as well as file a dispute with the reporting agency. You can learn more about this tool in our Getting Started with Nav video. Sign up to see it for free in Nav s Accounting Professional Advisor Program. 11

12 Can Business Owners Build Business Credit Fast? This is a question we get all the time from business owners. Building business credit is a process that does take time. We have, however, seen business owners make remarkable progress in less than a year if they re very proactive and engaged in building their business credit. The first step is to pay early. As previously mentioned, payment history is such an important factor when it comes to business credit reports. With some scores such as the D&B PAYDEX, the only way to score 100/100 is to pay early. Because payment information on business credit reports is often more detailed than on personal credit reports, paying faster can help build business credit scores more quickly. The second piece of advice for building good business credit is to make sure vendors and suppliers are reporting to business credit agencies. Again, not all vendors and lenders report to all commercial credit agencies. For example, a business credit card issuer may report to SBFE but not to D&B; the best way to see how each creditor is reporting is to check the reports. So be sure to encourage your clients to check their personal and business credit reports and scores with more than one major credit reporting agency to find out whether their accounts are helping their scores. Nav is the only source that allows business owners to see multiple business credit scores and reports for free. Sign up for Nav s free Accounting Professional Advisor Program to see how it can help your clients. Nav is the only source that allows business owners to see multiple business credit scores and reports for free. 12

13 How Business Owners Can Use Business Credit to Protect Their Business From Fraud In the world of credit, we are quick to associate the idea of fraud with the impact it has on the consumer or the individual. Identify theft and phishing scams are seemingly commonplace threats to our personal financial security, but what about businesses? Are they vulnerable to the same fraud? According to leading credit reporting agency Experian, business-to-business (or B2B) fraud is a multi-billion dollar per year problem for U.S. businesses. And you can bet that as more and more small businesses turn to e-commerce and virtual transactions to keep their cash flow flowing, that number will only go up. Fortunately, the same technology that emboldens and expands B2B fraud simultaneously provides tools to avoid it. One of the most effective of these tools is tracking a business s credit information. While personal credit scores are protected by the FCRA, anyone can pull a business s credit report anytime, without permission from the business. But even if fraud weren t part of the equation, checking another business s credit report is an important tool that should be used by all businesses who extend terms to another business, or make a large sale before collecting full payment up front. A small business owner s success depends largely on their customers ability to pay their bills on time. If customers can t pay their bills on time, it hurts that business s ability to keep cash flow at consistently healthy levels, and can eventually force them to go under. And, as many businesses learn the hard way, outward appearances don t count for a lot when push come to shove in the business world. Recent financial disasters have proved that it s sometimes the biggest and best-looking companies that end up collapsing and taking everyone down with them. As you yourself know, no matter how good your relationship with a potential business partner is, you should always keep in mind that what you see on the outside is what they want you to see. Their credit history may very well reveal a different picture. If your clients need to perform a credit check on any company with whom they re considering doing business, Nav s Premium Plus plan allows businesses to track detailed credit information on up to five different businesses at once. (Obtaining a single business credit report on another business would cost $40+ elsewhere.) 13

14 Nav s free Advisor Program is designed for professionals like yourself who work with small business owners. Through this program, advisors will have access to free tools and training so they can more effectively advise clients on ways to build strong business credit and improve their chances of getting access to capital when they need it. CPAs, Enrolled Agents and Accountants can use the Nav Advisor Program to help entrepreneurs understand the importance of building, monitoring and maintaining strong business and personal credit scores to grow their business and improve their financial health. You can sign up for free at nav.com/accounting 14

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