A Guide to Understanding Business Credit Reports

A business’s reputation and ability to secure funding or build partnerships is not just based on how good its offerings are. It starts with something much more rudimentary but important - a business credit report. After all, no consumer would want to conduct any business with a non-legitimate company.

A business credit report is just like a credit score you have on a personal basis. It is a credibility criterion through which stakeholders can evaluate a company’s reliability and financial health. So, how important are business credit reports, and how do they function? Let’s find out.

In simple terms, a business credit report is a document that contains information outlining a business’s creditworthiness and financial standing.

This report includes all the relevant information about the legality and financial stability of a business – its credit accounts, outstanding debts, payment history, liens, and public records.

Business credit reports essentially work like credit scores for individuals. They determine a business’s ability to borrow or conduct business with investors, lenders, suppliers, partners, or other stakeholders. Thus, they provide a comprehensive look into a company’s ability to manage its finances.

A business credit report contains all the relevant information about a company. The key components of this information include:

• Business Information

  Business information includes everything, from the company’s name, registered address, ownership, chain of board details, and industry classification. This information highlights the registration and legality of the company’s existence for access to the public.

• Public Records

  Public records include information relevant to any legal actions or potential financial inconsistencies of a business. This provides information on the company’s tax liens, pending judgments or cases, bankruptcies, and any legal issues that might affect the company’s creditworthiness. Public records help in evaluating risks associated with a company by judging how strong its financial records and legal standing are.

• Financial Information

  Financial information of a business can include its annual revenue, profits, asset acquisitions, debts, and, where available, valuation. This component of a business credit report provides insights for creditors and stakeholders to assess any risks associated with the company before investing.

• Credit Score

  The credit score sums up the company’s financial health through a numeric metric that represents the company’s credit risk. This helps lenders, investors, and suppliers make informed decisions about business engagement.

• Helps Financial Health and Planning

  A business credit report is useful not only for outsiders but also for companies. It provides a cohesive overview of a company’s overall financial health. This overview contains valuable insights that can help businesses make strategic financial decisions. Therefore, it is important for businesses to review this report regularly to optimize their strategies and identify weaknesses to improve upon.

• Effect on Interest Rates

  Low credit scores make it harder for companies to obtain loans from lenders and drive the interest rates higher. Meanwhile, high credit scores do the opposite. The cost of borrowing highly depends on how strong your credit reports are and can net you lower interest rates or even lucrative credit terms. This reduces the cost of debt for businesses, further strengthening their financial stability. A strong credit score also supports the business credit risk analysis process. It will help stakeholders evaluate your company more effectively.

• Builds Business Relationships

  As mentioned previously, external partners rely heavily on how strong a business credit report is before engaging with a business. It helps suppliers decide on what kind of credit terms to use to partner with a company. Similarly, potential stakeholders review the business credit report for risk assessment, which influences their collaborations or negotiations with a company.

The business credit score in India indicates the creditworthiness of a company. For small and medium-sized enterprises, CIBIL assigns a CIBIL Rank, which ranges from 1 to 10, where 1 represents the highest level of creditworthiness. Other credit bureaus like CRIF High Mark, Equifax, and Experian also provide business credit scores by taking into consideration factors like:

• Credit History
• Debt Levels
• Company Financials
• Business Age & Industry Risk
• Repayment History
• Credit Utilization

A business with a good credit profile has better financial opportunities. Since scoring models may vary across bureaus, here’s a general reference for credit ranks and scores used in India:

• CIBIL Rank 1 – 4: Excellent – High creditworthiness, easy loan approvals, better interest rates.

• CIBIL Rank 5 – 6: Good – Considered reliable but may have slightly higher interest rates.

• CIBIL Rank 7 – 8: Average – Loan approvals are difficult, and interest rates may be high.

• CIBIL Rank 9 – 10: Poor – High risk, limited financing options.

Lenders require businesses to meet various criteria before they sanction a credit line. To ensure that your business meets the requirements, here are some tips to improve your business credit score.

1. Pay Bills on Time and in Full

   Repay your business loans and credit lines on time to maintain a good credit score. Ensure that supplier or vendor invoices are cleared in time. Any late or partial payments can indicate negative markers for the credit bureaus assigning credit scores. Credit risk in supply chain disruptions is a leading reason for companies' lower credit scores. You can mitigate this risk by paying your bills on time.

2. Maintain a Good Payment History with Vendors

   Good relationships with vendors should also translate into paper. Strong financial relationships indicate to credit bureaus that you are consistent in your payments to the trade credit account. This improves your company’s credibility and your chances of negotiating better terms with the vendors.

3. Limit the Number of Credit Inquiries

   Always make sure to space out taking business loans or credit lines. Taking loans or credit lines out within a short period can lower your business credit score. It signals to the bureaus and lenders that your company is going through financial instability or distress. Only seek new credit when it is absolutely necessary.

4. Review Your Credit Report Regularly

   Request reports from the credit bureaus to access your updated credit report regularly. Regular monitoring of your credit report can help you identify any financial discrepancies that may negatively affect your credit score. You can even dispute any inaccuracies in the report promptly to improve your overall credit score.

Now that you know how business credit reports function and their importance, it is time to put them to good use to grow your business. With Dun & Bradstreet, you can keep a close eye on your company's financial health. We assign a DUNS number that acts as a unique identifier used to track a business's credit profile and validate its credibility. Get in touch with us today to learn more.