Creditera is a new service which helps business owners analyze, monitor and improve their business credit.
We all know how important personal credit is – affect your loans and other finances. However, your business credit can affect the financing as related to your business.
Creditera joins Dun and Bradstreet Credit Corporation in offering business credit services to small businesses. Creditera is from free (yes they have a free offering) to paid offerings which start from $30 – $50 a month and DBCC is $1,500 per year.
Levi King, CEO of Creditera offers his insight below.
Why is credit important for small businesses?
Credit impacts a business’s ability to get approved for favorable financing terms (or any financing at all), impacts the costs of many goods and services the business uses, can be used against them by competitors, and dictates whether they qualify to sell goods or services to most big businesses and governments, whether federal, state, or local municipalities.
Financing: Almost every type of commercial financing relies on credit as either the primary or a strong secondary factor. The primary reason so many businesses don’t qualify for any type of financing, or why they only qualify for high cost alternative financing, is because their credit isn’t up to speed. By “credit” I’m talking about personal and business credit. Most business owners don’t pay attention to their business credit, and either it has inaccuracies like lower reported revenues or erroneous SIC / NAICS codes, it contains derogatory information like late payments, collections, or public records, or there just isn’t much reporting, which is a red flag for an established business.
Goods & services: Most of the multi-trillion B2B commerce economy is partially priced on credit. Merchant processors use business and personal credit data to underwrite risk and price discount rates, business insurance premiums are impacted by credit, and all wholesalers and suppliers use credit to determine whether to extend payment terms to their customers. If you are a manufacturer or retailer, and your suppliers and wholesalers won’t extend net 60 or 90 terms, managing cash flow can be very difficult.
Competitors: I learned this the hard way years ago when I had an electric sign manufacturing company. I bid a large job with a car dealership consortium, and I didn’t win the job. The consortium had used my company for small jobs and service work, so I was disappointed and gave the person spearheading the bidding process a hard time. He pulled out the bid of a competitor, a company much larger than mine, and showed me a copy of my business credit report that my competitor supplied to them. It was not a stellar report, and it made him uncomfortable cutting me a six figure check for a down payment on the job, because if I couldn’t deliver they would lose their money (plus not be ready for their grand opening).
Big business & government: Small businesses want to provide their goods or services to big companies or government entities. To qualify to do business with most of them, you have to have a minimum business credit score of 75 (almost always D&B). If you don’t, tough luck. It doesn’t matter if you have the best pricing.
Personal guarantees: Business owners oftentimes want to avoid personal guarantees on supplier contracts, with their landlord, on equipment leases, merchant processing contracts, et cetera. It is possible to avoid personal guarantees on just about everything but business financing if you have strong business credit.
What common misconceptions about credit exist among small businesses?
I don’t have any business credit — Oftentimes business owners think they don’t have business credit because they haven’t had a business loan. Usually they will have at least a supplier or two reporting on them. That said, even if they don’t have a supplier reporting, they will oftentimes have a score without a single creditor reporting. How is that possible? As the bureau gains other data on the business, such as geography, industry, revenues, time in business, and other header information, they can assign risk simply based on those factors. If you are in a high risk industry with revenues lower than your peers in your geography, then it can be assumed you are probably higher risk than they are. Even if you match up with peers, simply the fact that you are in a high risk industry can cause you to have a lower score than other identical credit reports of business owners in low risk industries (all things equal).
I have good business credit, but the lender said they don’t even look at business credit — If the business owner is watching their business credit, it tends to almost always be D&B. The problem is that D&B is primarily used in all goods & services transactions, as well as government and big business vetting, but not very much by many commercial lenders. Those lenders tend to use Experian or Equifax business credit reports. There is much misunderstanding by business owners about how business credit data is used.
The lender said they don’t care about the business credit score — Even more confusing, many of the lenders using Experian or Equifax business credit reports don’t care about the score, rather the content of the report. Many times the business score is used by the lender as a dis-qualifier rather than a qualifier. The opposite is true in the goods and services world, where usually the score matters every bit as much as the report content.
I have good business credit but I still have to sign personal guarantees — Sometimes this is the case because the business owner is watching one business bureau, but the 3rd party pulls a different bureau that isn’t in as good of shape. The most common reason for this, however, is that the business owner doesn’t push back on the 3rd party. The vendor wants their business, and if the business has good business credit, they have leverage to tell the vendor that if they want their business, they will go off of the business credit.
If I have good business credit I can get financing without a personal guarantee — While it is fairly easy to negotiate out of personal guarantees with good business credit on most vendors, suppliers, or service providers, you will almost never be able to get out of a personal guarantee with lenders. There are exceptions in alternative financing, such as accounts receivables financing, equipment financing, and a merchant cash advance, but it is virtually impossible to accomplish on any type of traditional financing through banks, credit unions, or non-bank SBA lenders.
What steps can small businesses take to improve their credit?
Some of the ways to improve are obvious, such as paying your bills on time (as a person and as a business), but others are not as obvious:
- Review your credit reports for errors — Mistakes on credit reports is not a trivial matter, about 25% of all credit reports, whether personal or business have material errors.
- Dispute errors — It’s always best to submit evidence of errors in any credit dispute. It is an easier process with personal credit because the bureaus and creditors have to follow guidelines provided by the Fair Credit Reporting Act, however, that legislation doesn’t extend itself to protection and coverage for small businesses and their credit reports. To correct errors on business credit reports, evidence of errors must always be submitted with a dispute, and there are no official timelines for response.
- Use credit — Many business owners operate entirely on cash, which is good for keeping track of cash flow, but bad for building credit and positioning yourself to have better options in the future. Open credit accounts in your business name, use them, and make payments on time. This is the best way to improve your credit, whether it’s bad because of derogatory information or it simply doesn’t have much reporting, adding positive information is best.
How have your experiences as an entrepreneur shaped your approach to the Free Membership service you provide through Creditera?
In my early career I started and sold several small businesses — an electric sign manufacturing company, a hotel, a franchise, and a financial services company with a couple retail locations. In each of these businesses I used my personal and business credit on a regular basis with vendors, suppliers, service providers, and lenders. I’ve been approved for over 30 business loans including two SBA loans. The first technology company I founded is Lendio, a company that matches business owners with the best financing options for their business.
Prior to my departure from Lendio to launch Creditera, we had over 1M small business owners create an account to try and secure financing. The vast majority of those business owners didn’t like their options, and about half of them had no options whatsoever. The common thread, regardless of their success or lack thereof, was that their credit was off, they didn’t understand it, they didn’t know what to do about it, it was hurting them, and there was no solution offered by any company to help them out.
As a former small business owner, I know that oftentimes cash is too tight to pay for credit reports and monitoring. I also know that sometimes it mattered more than others to dive deep into the report data. We offered a product for almost two years to business owners at a price of $29 per month. We gathered tons and tons of feedback from our customers and those that didn’t become customers, and determined we needed to be able to offer a robust free product. Our free product is a three credit bureau product, made up of one personal bureau and two business bureaus. (Free membership represents data from the top leading credit reporting bureaus, including one personal credit score, two business credit ratings, three summary credit reports, and three sets of monitoring alerts.) This has never been done before, and it’s a big damned deal. We align our interests with our customers by using their credit data to make recommendations on how to lower costs or get better financing, and if they take our advice and are successful, we are paid by the 3rd party. For total credit nerds like us, they can still pay $29 per month for additional data, or $49 per month if they want to watch their data plus a few customers or competitors’ business credit data.
How do you think credit empowerment will change the small business landscape?
Way too many small businesses fail. They fail for many reasons, but lack of financing is the biggest. Beyond that problem, many voluntarily fail simply because they don’t make enough profits to live on. There are many awesome lenders trying to help businesses get financing through alternative loan products, but the cost is higher because the risk is higher. Those great lenders are addressing things how they are. They deal with the credit landscape as it exists. At Creditera we are the only company looking to change the credit landscape for all 30M small businesses. We help them improve, protect, and leverage their credit data to lower costs and access financing so they can create the business of their dreams and live life to the fullest. We believe that we can move the needle for small businesses in America. We can help more avoid failure, help more thrive, and help them kick ass for their customers.