Business and consumer credit reports have similar purposes: to inform prospective lenders about your creditworthiness and allow them to assess what risk they are taking should they give you a loan or credit card or extend “buy now, pay later” terms to you or your business. However, they differ in the types of information they contain and how they are used.
Consumer Credit Report
When you first apply for credit, the three major credit bureaus – Experian, TransUnion and Equifax – begin to compile a credit profile based on your credit activities. Only people with a “permissible purpose,” as defined by the Fair Credit Reporting Act, may request your credit report. When they do, the bureaus generate a report that includes the following:
- a list of your credit accounts, including loans and credit cards
- the balance owed and the current monthly payment on each account
- an indication that the accounts are current and properly paid, or delinquent with the number of days past due
- a list of closed accounts
- public records of liens, judgments and bankruptcies
- information on past and current employers
- history of residential addresses
The credit bureaus analyze the information to generate a credit score, which lenders use as a measure of your creditworthiness. Although your credit score may differ slightly among the three credit bureaus, all three generally use standard methods and algorithms established by the Fair Isaac Corporation, which generates your FICO score. Consumers are entitled by law to receive one free credit report each year from each of the credit bureaus. (You can access it at annualcreditreport.com, the official website.) The credit score is not included with the credit report and must be obtained separately.
Business Credit Report
Businesses need to be more proactive than consumers to establish their own credit histories so they can obtain credit separately from the personal credit of the business owner. Once an incorporated or LLC business obtains a federal tax identification number, the business credit bureaus can begin tracking trade credit and other credit activities. Trade credit transactions occur when a supplier lets a business buy now and pay later. Payments on trade credit are reported to the business credit bureaus.
A business credit report includes the following information:
- business background information, including ownership and subsidiaries
- company financial information
- banking, trade and collection history
- liens, judgments and bankruptcies
- risk scores
The three business credit bureaus – Equifax, Experian and Dun & Bradstreet – generate business credit scores from the information, as does FICO. Unlike consumer credit scores, which use standard methods and algorithms for scoring, each of the business credit bureaus uses completely different methods for scoring business credit risk, with different score ranges. For instance, Dun & Bradstreet's PAYDEX focuses on how promptly a business pays its bills – useful information for vendors and suppliers when they’re extending trade terms – while Experian’s Intelliscore Plus reports on the chance of your business falling seriously behind on its bills in the next 12 months, something lenders want to know.
Business credit reports must be purchased from the credit bureaus, and unlike consumer credit reports, they are public, available to anyone who pays the fee. There is no federally mandated free annual business credit report for businesses. You'll have to pay to get a copy of your report from each agency, although some free information is available from websites such as CreditSignal.com (for Dun & Bradstreet) and Nav.com.
When Business and Personal Credit Reports Mix
It’s important for business owners to establish separate credit profiles for their businesses. Without a business credit profile, lenders rely on the business owner's personal credit profile for determining credit risk, which can limit the business's capacity to borrow what it needs.
Until a business establishes a business credit profile, the owner will be personally liable for any loan obligations, even if the business is a separate legal entity. It's rare for a new business to be able to get a loan without a signed personal guarantee by the business owner.
Business owners need to take deliberate steps to establish and build their business credit profiles as early in their development as possible.
- Create a separate legal entity for the business, such as an S Corp, partnership or LLC.
- Separate business and personal bank accounts and record keeping.
- Apply for a D-U-N-S number from Dun & Bradstreet. (It will establish your file with that bureau.)
- Establish trade credit accounts with vendors and suppliers.
- Obtain a business credit card; it could start with a gas card. If a bank offers a business credit card, make sure it reports payments to the business credit bureaus.
- Make all payments on time.
- Order business credit reports regularly to see that they are updated correctly.
Business credit reports can also be very useful management tools. Each of the business credit bureaus offers premium reporting services that can provide in-depth analysis for managing credit risk and business forecasting. A good business credit score means your business will have access to the financing it needs to grow, at lower interest rates; more favorable payment terms from vendors; and lower rates on some commercial insurance.