Today more than ever, small businesses need to be proactive in protecting their important credit asset. In this still fragile economy, credit scores and ratios can make the difference between a business’s ability to fail or succeed.
Like consumers, scores play an important role in determining business credit. The right credit score is invaluable when negotiating lower lease payments, getting business loans approved, or when a potential client chooses a company for business-to-business (B2B) services.
Credit challenges can come in many forms. The sad truth is that a late payment or collection account for a specific debt listed on a company’s business report can lower a score by more than 40 points. This will immediately place a company in the high risk category! The amount of information processed in consumer and business credit scores is large and complex.
Important points small business owners need to know to give a business access to financial tools that can help them get bigger customers and earn more revenue are:
Dun & Bradstreet Credit Score and Rating is the oldest and most popular provider of business credit scores and ratings. Businesses with low D&B scores may be denied loans, cut off or close extensions of credit, be turned down for offers and services by potential customers, or have their products removed. There are quite a few scores and ratios used by this business credit bureau.
The Paydex score is used to assess creditor payment patterns and is weighted in dollars based on the vendor accounts listed on a company’s report. Paydex scores range from one to 100. A strong Paydex score (80) gives a business access to financial tools that can help it get bigger customers and earn more revenue. Below 60 could mean a lot of defaults or very little credit history. In this case, a business is likely to have trouble getting loans approved, extensions of credit, or, at best, paying higher rates for leases.
A financial stress score is designed to help predict a company’s potential for failure. It indicates the probability that a company will obtain legal relief from creditors or cease operations without paying creditors in full during the next year. The score uses the full range of D&B information, including financials, comparative financial ratios, payment trends, public filings, demographics, and more.
Recently, businesses have experienced challenges with these credit scores and their ability to meet business goals. A fast-growing network and IT solutions provider was caught in a frustrating negative cycle. When your existing customers delayed payments on time, it caused a ripple effect of slow payments to vendors. It was agreed that they needed a daily credit check by a reputable credit restoration company and improvements to offset the dilemma of the current credit problem. To date, as soon as an issue arises, it is addressed and scores can be maintained, if not increased. Legitimate business credit repair companies can improve credit scores by changing and adding information that can offset initial declines and manage better scores. Some larger corporations like Wal-Mart won’t even look twice at potential vendors with a risk score above six on their Dun and Bradstreet credit profiles. Causes of low credit ratings range from a bookkeeper making late payments to situations as big as accounts receivable that can’t be collected causing bills to be late. But once the damage is done, it’s an uphill battle and fully understanding the consequences is a huge burden at best. Without constant care, a business can really suffer from these credit drops.
Credit Fluctuations – Another credit challenge we’ve seen affecting small businesses is when credit scores are in a great position today, but have shown negative fluctuations in the last 12-24 months. A Westchester doctor who started his own practice and applied for equipment leasing was turned down due to a history of low scoring. A collection appeared in the reports of him constantly over a period of seven months. Although the charge was a mistake and the bureau agreed to remove it from his profile, past delinquency history was still visible. Although his current score was excellent, he was unable to obtain the financing he needed with his business name. Fortunately for him, his personal credit scores were excellent and he was able to personally sign the equipment loan.
Being proactive and ensuring that scores are managed by a professional or someone within the company who can handle this task efficiently and responsibly can save huge financial costs and stress. It is essential that small business owners stay abreast of the current score requirements. In this economy, the right sources providing cutting-edge information can make a world of difference.