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With lenders clamping down, small business owners need to ensure that credit report errors don't keep them from getting loans or trade credit
Do you know what's in your company's business credit report? If you've ever had a line of credit with a bank or supplier or a lien or court judgment against your company, a credit file on your business may exist, even if you've never seen it.
Like personal credit reports used to evaluate consumer borrowers, business credit reports collect financial information and payment histories to help banks and vendors decide whether a company is likely to default. Some creditors may give more weight to factors such as your financial statements and trade references; but for others, the credit report is the first thing they look at.
A credit report, however, might be inaccurate, making your company appear riskier than it actually is. "Commercial credit reports, more so than a consumer credit report, can be somewhat incomplete," says Dan Meder, vice-president of marketing and product development for Experian. While there's little data available on the accuracy of business credit reports, a 2004 study by nonprofit public advocacy organization U.S. Public Interest Research Group of about 200 consumer credit reports found that a quarter contained a serious error and 79% had some sort of mistake.
Three main companies compile most of the business credit reports for small businesses in the U.S.: Dun & Bradstreet (DNB), which reports exclusively on businesses, and credit bureaus Experian and Equifax (EFX), which also compile consumer credit reports. These companies collect information on private companies from trade partners and creditors and from public records such as incorporation documents, liens, bankruptcy filings, and judgments. Anyone can purchase the reports these bureaus generate on your business, with basic reports starting at around $50.
If there are errors on your report, such as accounts wrongly listed as delinquent, you should contact the bureaus. The problem may not be the bureau's fault, but rather a mistake from a third party reporting data to them. "I think it is important for a small business owner to understand what's being reported about them," says Meder. "At Experian, we're just reporting what's being reported to us."
The Value of Trade References
Even if your report is inaccurate, you may not need to correct it to get credit, depending on your suppliers and lenders, says Doug Palmer, chief executive of Bethesda (Md.) accounting firm Palmer Financial. While it helps to have a clean credit file, it's more important to have trade references, solid financial statements, and a bank that will vouch for your company, he says. Palmer is skeptical of the value of D&B reports, and he advises clients not to purchase services to build or update their credit files unless specific vendors require the information. "You'll find that companies' financials really speak for themselves a lot more," he says. (Dun & Bradstreet declined to comment for this article, citing a quiet period before reporting earnings.)
Still, a black mark on a business credit report can keep you from getting trade lines, especially from larger vendors. "Dell is not going to sit and call the banker for this small business owner," says David Gass, president of Business Credit Services, a Las Vegas firm that helps small companies obtain credit. "They simply say: 'Let's pull a D&B report.'" He suggests that companies begin to build business credit by opening business accounts with office supply stores, shipping companies, and other vendors that will report the transactions to the bureaus.
Small business owners should also remember that information in business credit files can be purchased by anyone—including competitors. For that reason, Gass says, you should be careful before supplying financial statements or other data you might not want to be made public. If lenders want to see financials before extending credit, you can provide them directly.
Gass says correcting mistakes on a business credit report can be difficult, though credit bureaus say the first step is to contact them and report the error. He warns that before purchasing services from bureaus offering to update your profile, make sure the information being compiled on your company will not raise a red flag. For example, he says, the listing of a post office box address or a nonworking phone line can make your business appear less than legitimate, which would reflect badly in an updated credit file.
The credit bureaus differ in how they correct information. While Dun & Bradstreet sells services to update credit files, Experian says all its information is collected from third parties and public records, rather than business owners themselves.
Credit Report Nightmare
Depending on how your business is organized, your personal credit report may be as important or more than your business credit file. For sole proprietorships or partnerships, in which the owners are personally liable for business debts, creditors take into account personal credit histories. Even for incorporated businesses, any credit lines that are personally guaranteed—such as many business credit cards (BusinessWeek.com, 8/20/08)—can be affected by your consumer credit record.
Errors in either business or personal credit reports can turn into a nightmare for your company, as they did for Bill Leake, CEO of Apogee Search, a 63-employee online marketing firm in Austin. Last May, his personal credit report erroneously showed a utility bill from an old office address as unpaid. American Express (AXP) froze Leake's credit across several cards that he depended on to buy $250,000 worth of online advertising a month for clients. "It turned out that an error on a credit report that we're able to prove was an error on a credit report had flagged something on their system," Leake says.
By law consumers can get a free copy of their personal credit reports (BusinessWeek, 9/17/07) from each bureau once a year, but business owners must purchase reports on their companies. If you don't know what's in your personal or business credit files, now is a good time to check and correct any mistakes, says Experian's Meder. "It's very important in times of tightening credit, both on the commercial and the personal side, that you want to say as clean as possible for both," he says.