The importance of a good business credit report

Just as important as the credit information on the owner of the business is the credit information on the business itself. Although not new as evidenced by this twelve year old business report, the collection and gathering of financial information has turned into a technologically advanced multi Billion dollar industry as reflected by the $1.1 Billion in revenue shown by Equifax, Inc. during 2001 and the $1.25 Billion in revenue enjoyed by Dun & Bradstreet Corp. during 2001. The growth in the use of these reports is fueled by the increasing reliance on credit decision software by lending institutions.

It used to be that lenders would take the time to do a tailored analysis of the small business loan request. They would do a memorandum for each request of several pages. However, small business loans are not particularly profitable if done this way. Actually, most people in my business will tell you that lending in the under $100,000 market is not profitable at all, due to the high levels of operating expenses and higher than normal default rate involved. I know that some of you might not believe me when you read this. I remember mentioning this to a friend of mine and he said, "If you guys were not making money lending to small business, you would not be doing it!". I decided to leave it at that, but it is enough to say that banks have a mandate to do a certain amount of loans to small business and that when I refer to "people in my business", I am talking about banking. I am not talking about other types of financing companies and sub-prime lending outfits that command a higher level of interest.

Having said that, banks decided to lower the expense of analyzing small business requests and to expedite the process of underwriting by relying on data provided by these credit report collection agencies. Although these companies do not usually provide what could be considered the ideal credit report, the information is relied on to make decisions on business loans and it is probably along with the credit history of the owner the most important factors on small loans "usually under $250,000" that are processed using credit decision software. It should be noted that my knowledge of the actual formula used to calculate the score is unknown to me so this is only an educated guess.

If there is one common thread in D&B reports it is this: The less call there is for credit information on a given company, the less informative their report will be. The reason is simple: D&B puts their resources where they will do the most good. Pull up a report on a fortune 500 manufacturing company, and you'll find tons of trade experience information, excellent financials, lots of antecedent info on the officers--in short, everything you'd want. Pull a report on a small firm that rarely has inquiries, and you'll see a lot of boiler-plate, unaudited financial information, few trade references, if any at all.

These small company reports are most prone to containing inaccurate information, because even D&B doesn't have any way of checking it for accuracy. Small business owners often provide inflated financials (look for D&B to say that they were "verbal estimates--that's the giveaway), downright phony antecedent information on the principals, and misleading data about the number of customers. In many cases, D&B didn't personally visit these companies--they just phoned them and reported whatever the respondent said. Unfortunately, creditors need information on small, unknown firms more than they do on large ones. 

Business Credit Reports Industry players:
Dun & Bradstreet Corp. is by far the dominant player in the United States. The Company's comprehensive database contains information on more than 70 million public and private business entities located in more than 200 countries. The database is the information source that forms the backbone of the full spectrum of solutions D&B offers to help customers make business decisions. (sample DNB Report).

Veritas. Not as complete as D&B, but somewhat stronger international presence in some markets. Veritas, through the Info Alliance network, has a presence in 64 countries with a database of over 20 million companies. My experience is limited with this company as only a couple of Veritas reports have crossed my desk in the last 6 years. However, the quality of the ones that I saw covering international companies seemed solid.

What you can do as a business owner to improve the quality of your business report is to contact D&B and get a D-U-N-S number. The service is free. They might try to sell you some type of paid service that supposedly will keep track of your business credit, but unless you got money to burn do not bother. If you already have a number, make sure to update the information they have about your company.