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5 Critical Factors that Determine your Business Creditworthiness
- 1. 5Critical Factors that Determineyour BusinessCreditworthiness
- 2. Ty Crandall CEO, CreditSuite (877) 600-2487 [email protected] www.creditsuite.com/EIN
- 3. BusinessCredit Business creditis credit under a business’s name Scores reflect how well the business can pay its debts … … and not the owner It can be wildly different from your personal credit scores www.creditsuite.com/EIN
- 4. It isnot subject to the Fair Credit Reporting Act As a result, anyone can pull your business credit report This means lenders and vendors, but also … … competitors and, really, anyone www.creditsuite.com/EIN BusinessCredit
- 5. Creditworthiness Creditworthiness isa lender calculation It determines the possibility a borrower … … might default on debt obligations www.creditsuite.com/EIN
- 6. According to Investopedia,it is: “… a valuation performed by lenders that determines the possibility a borrower may default on his debt obligations. It considers factors, such as repayment history and credit score. Lending institutions also consider the amount of available assets and the amount of liabilities to determine the probability of a customer's default.” www.creditsuite.com/EIN Creditworthiness
- 7. Quite simply, themore creditworthy your business is, the more likely you will get favorable credit terms And it can mean the difference between getting a loan or credit at all … … or not The more creditworthy your business is, the more you’ll save money with more favorable credit terms www.creditsuite.com/EIN Creditworthiness
- 8. #1 – BusinessCreditScore Thisis the overall measurement of whether your business should get credit Business credit scores from Dun & Bradstreet, Equifax, and Experian are the ones most commonly reviewed by lenders and vendors The scores can vary as these credit reporting agencies’ calculations can differ But they should roughly be the same, as they consider the same things www.creditsuite.com/EIN
- 9. For newbusinesses and for sole proprietorships, lenders and vendors will also look to your personal credit score This is because your business credit score is understandably low or nonexistent If a lender or vendor asks for your Social Security number, it means they are taking your consumer credit into consideration This means there will be an inquiry on your consumer credit – and inquiries can lower consumer credit scores It can also mean the creditor wants a personal guarantee from you www.creditsuite.com/EIN #1 – BusinessCreditScore
- 10. Dun & Bradstreet D&Buses predictive modeling to calculate your score They consider (among other things): Likelihood of business failure Business financial stress These factors are checked against similar companies in your industry www.creditsuite.com/EIN
- 11. D&B providesa rating. It is based on: information in your company’s interim or fiscal balance sheet an overall evaluation of your firm’s creditworthiness The scale goes from 5A to HH; these Rating Classifications show your company size based on worth or equity as computed by Dun & Bradstreet They assign such a rating only if your company has supplied a current financial statement www.creditsuite.com/EIN Dun & Bradstreet
- 12. The DelinquencyPredictor is intended to figure out how likely your company is to be late in paying your debts This takes historical information to try to predict future outcomes D&B considers objective and statistically derived data, rather than subjective and intuitive judgments They use a scoring system to rank and order accounts based on the probability of late payments However, Predictive Scoring only represents a statistical probability, and not a guarantee www.creditsuite.com/EIN Dun & Bradstreet
- 13. PAYDEX Score APAYDEX Score is Dun & Bradstreet’s dollar-weighted numerical rating of how your company has paid the bills over the past year D&B bases this score on trade experiences reported by various vendors The D&B PAYDEX Score ranges from 1 to 100 Higher scores mean a better payment performance www.creditsuite.com/EIN
- 14. Experian Among other factors,Experian considers: Your history of trade payments Payment trends Inquiries by creditors www.creditsuite.com/EIN
- 15. Equifax In additionto other factors, Equifax takes into consideration: Credit usage Median open balance Current credit limits Your company’s 24 month history www.creditsuite.com/EIN
- 16. #2 – RepaymentHistory How well does your business pay its bills? Are you late, early, or on time? Do you pay in part, or in full? How has your company performed over time? www.creditsuite.com/EIN
- 17. The credit reportingagencies generally look at the previous 12 months They consider your payment trends … … Are you showing continuing payment failures … … or are you turning it around? www.creditsuite.com/EIN #2 – Repayment History
- 18. #3 – LengthofCredit History Is your company a startup, or new to credit? Then by definition your credit will be poor or incomplete As you might expect, the main cure for this is time … … so be patient www.creditsuite.com/EIN
- 19. A short businesscredit history will often be why a creditor will want to look at your consumer credit Or they might want a personal guarantee So they are likely to request a Social Security number to look up your consumer credit scores www.creditsuite.com/EIN #3 – Length ofCredit History
- 20. #4 – DerogatoryEntries Creditors will look at a number of negatives in your report As you might expect, these negatives are of great interest to creditors And unlike with consumer credit, there is no time limit on how long they can stay on your business credit reports www.creditsuite.com/EIN
- 21. Typical derogatory entries include: Tax liens Judgments Bankruptcies UCC filings Accounts that have gone into collections www.creditsuite.com/EIN #4 – Derogatory Entries
- 22. Dun & Bradstreet “CurrentlyDun & Bradstreet retains up to 24 months of payment experiences in the trade repository. Dun & Bradstreet will use up to 874 payment experiences.” That seems to mean that after 24 months payment information will not affect a business’s credit score, at least so far as a D&B PAYDEX score is concerned www.creditsuite.com/EIN
- 23. In addition,the D&B website states: “…on an annual basis Dun & Bradstreet cleanses its database to remove the following filings: Suits andJudgments that have been inactive for 10 or more years Liens that have been inactive for 11 or more years of inactivity.” Hence certain types of information, such as lawsuits, judgments and liens, may be reported for a lot longer than 24 months www.creditsuite.com/EIN Dun & Bradstreet
- 24. Experian On itswebsite, Experian says: “Dating data ensures that the information presented in a report is current enough to create an accurate picture of financial health. Trade data: 36 months Bankruptcies: nine years and nine months Judgments: six years and nine months Tax liens: six years and nine months UniformCommercial Code filings: five years Collections: six years and nine months Bank, government and leasing data: 36 months” www.creditsuite.com/EIN
- 25. Equifax Per Equifax,for commercial credit report information about trade lines, that will be reported for up to 24 months, whether negative or not Equifax says it does not report collection data from third parties However, an account could list that it is ‘in collection’ status In addition, Equifax states that information can impact a business credit score for up to five years www.creditsuite.com/EIN
- 26. #5 –Collateral For alot of business lending, collateral is a must Does your business have collateral? Consider the lender’s perspective: they need to know you can pay back on time And if you can’t, then they want something of value from you www.creditsuite.com/EIN
- 27. This isany property owned by the borrower which can be pledged for security If the property has been previously pledged against another loan, then lenders would probably not consider it available to be pledged again until the previous loan has been paid off www.creditsuite.com/EIN #5 –Collateral
- 28. Collateral can takeseveral forms: Equipment owned by the business Accounts receivable Real estate Inventory www.creditsuite.com/EIN #5 –Collateral
- 29. Collateral can alsobe: Stocks or bonds owned by the borrower A 401(k) account or IRA Book of business if the business is insurance (although not State Farm as they don’t own their books of business) www.creditsuite.com/EIN #5 –Collateral
- 30. Bonus #6 –CashFlow How much money is coming into your business? And how much is going out? Can you show you have new business coming in? www.creditsuite.com/EIN
- 31. What aCreditor Looks foron a Balance Sheet Current Ratio – by comparing the ratio between current assets and current liabilities, you determine the liquidity of the business or its ability to meet short-term obligations Current assets will usually be converted to cash within one year and include cash and securities as well as inventory and receivables Current liabilities are obligations payable within one year Banks generally want at least a 2-1 quick ratio or twice as many current assets as current liabilities, but acceptable ratios can vary www.creditsuite.com/EIN
- 32. Quick Ratio –Inventory is part of the value of current assets for a business, but it can be more difficult to turn quickly The quick ratio is similar to the current ratio, but it removes inventory from the asset equation and just considers cash, marketable securities and accounts receivable www.creditsuite.com/EIN What aCreditor Looks for on a Balance Sheet
- 33. Debt toEquity Ratio –This compares liabilities with the owner's total equity It shows how much of the company is financed by debt versus the amount financed by equity Trends over time are valuable for analysis If the ratio is increasing, the business could be at risk from taking on too much debt This is a good indicator of the solvency of the business or its ability to continue operations long term www.creditsuite.com/EIN What aCreditor Looks for on a Balance Sheet
- 34. ReceivablesTurnover –Thisis the total amount of receivables divided by the total amount of collections for a specific time If a business collects $1,000 in one week and has total receivables of $10,000, this business has a ten-week turnover of receivables If the receivables turnover is increasing, the business may have a problem collecting its accounts www.creditsuite.com/EIN What aCreditor Looks for on a Balance Sheet
- 35. Interest CoverageRatio –This shows how well the business may cover its future loan payments Divide the total operating cash flow (earnings before taxes and interest) by the total amount of interest paid on business loans A ratio of over 3 to 1 indicates the company should be able to make future payments If the ratio drops under this level, the business could have too much debt in relationship to its income www.creditsuite.com/EIN What aCreditor Looks for on a Balance Sheet
- 36. ImprovingYour Business’sCreditworthiness The mosteffective way to raise business credit scores is to … … pay on time … … and in full, every time This matters more than anything else! www.creditsuite.com/EIN
- 37. Developing a goodrepayment history is crucial Start with small starter vendors These are trade lines which often provide Net 30 terms You’re less likely to be turned down They often don’t pull your credit reports at all www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 38. Continuing todevelop a good repayment history means, after getting 5 – 8 trade lines, moving onto revolving store credit As before, pay on time and in full With 10 or more store accounts, move onto fleet credit This is credit to maintain, fuel, and repair vehicles Once again – pay your bills on time! www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 39. After getting 14or more lines reporting, move onto cash credit Your limits tend to be higher These are cards accepted in more places These are vendors more likely to have what you need You guessed it – pay your bills on time! www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 40. About the onlything you can do about the length of your credit history is to be patient and allow time to elapse In the meantime, as you build credit via trade lines and more, the time will pass … … and you’ll have more payment experiences too www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 41. You can preventsome derogatory entries by being responsible with credit Businesses which pay on time and in full don’t go into collections And they are a lot less likely to be sued – at least for nonpayment of their bills After a year, try contacting the credit reporting agencies and see if you can get a derogatory item removed You’ll never know unless you ask www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 42. Be creative whencoming up with collateral An investor might want to help you out in exchange for a piece of your business Your company’s accounts receivable can be tapped So can your equipment and inventory www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 43. You can’talways predict or improve your cash flow But you can ‘fire’ clients which don’t pay you on time Or you can give your uncollected invoices over to a factoring company Factoring companies, for a piece of your invoice, will pay you the majority of your invoice and then collect from your debtor the full face amount This helps to normalize your cash flow www.creditsuite.com/EIN ImprovingYour Business’sCreditworthiness
- 44. Recap for 5Criticalfactors that determine your business creditworthiness Business credit accounts for a business’s ability to pay back its debts, not the owner’s It is not subject to the Fair Credit Reporting Act Creditors consider your business credit scores … … and payment history www.creditsuite.com/EIN
- 45. Creditors also considerthe length of your credit history … any derogatory items on your report … what kind of collateral you’ve got … and your business’s cash flow www.creditsuite.com/EIN Recap for 5Critical factors that determine your business creditworthiness
- 46. Creditors check balancesheets to determine business creditworthiness They investigate: Current Ratio Quick Ratio Debt to Equity Ratio ReceivablesTurnover and Interest Coverage Ratio www.creditsuite.com/EIN Recap for 5Critical factors that determine your business creditworthiness
- 47. Work toimprove your creditworthiness Paying your bills on time and building business credit the right way willALWAYS help Try to stay out of derogatory hot water Be creative in coming up with collateral Get your company into a good cash flow rhythm www.creditsuite.com/EIN Recap for 5Critical factors that determine your business creditworthiness
- 48. www.creditsuite.com/EIN 5 Critical Factorsthat Determine your Business Creditworthiness Contact Us for More Information 877-600-2487 [email protected]