By EMILY MALTBY, The Wall Street Journal
Credit scores are often touted as the make-it-or-break-it factor for business loans and credit lines. But even entrepreneurs with high business credit scores may have trouble getting financing.
Credit scores are often touted as the make-it-or-break-it factor for business loans and credit lines. But entrepreneurs with high business credit scores may find it difficult to obtain financing. WSJ’s Emily Maltby tells Kelsey Hubbard more.
This is partly because business-credit scores—as well as personal-credit scores—have become a weak indicator of repayment ability, at least in the eyes of some large lenders.
“It’s a lagging indicator,” says Kathie Sowa, a commercial banking executive at Bank of America Corp. “We are underwriting more on a traditional basis. We look at the full picture,” she says.
Some of the metrics Bank of America prefers to rely on include cash flow and collateral to determine a business’s creditworthiness, she says.
Mercantile Capital Corp., a non-depository lender in Altamonte Springs, Fla., that specializes in commercial real-estate loans, also doesn’t give much weight to business-credit scores, which many entrepreneurs establish in the hopes of strengthening their position to secure financing.
Mercantile’s chief executive, Chris Hurn, says those scores may not be objective, given that business owners can submit their own information to certain credit bureaus.
Mercantile, however, does look closely at an owner’s personal-credit score because it “reflects the character of the person you’re dealing with,” Mr. Hurn says. “They say not whether they can pay back, but what their intent is to pay back.”
Banks such as Mercantile can often gain all pertinent information without the business-credit score. Business owners’ personal and business finances are usually intertwined and business lines of credit that carry a personal guarantee often show up on personal reports.
But Gerri Detweiler, a personal-finance adviser at Credit.com Inc. in San Francisco, reasons that even if high business-credit scores are unlikely to be the defining factor in procuring credit, they can help get the process started on the right foot. What’s more, poor credit scores can be detrimental.
Many owners have already poured energy into establishing business credit, which is no easy task. The Federal Trade Commission provides information for consumer credit reports, but there are few such resources available for corporate credit reports, which are riddled with reporting exceptions and inconsistencies.
Take vendor credit lines, for example. Some vendors are prone to submit data to the bureaus only in the case of delinquent payment, while other vendors may not submit at all.
It’s a similar story for traditional lines of credit.
Some bank lines won’t appear on any report unless the business defaults, in which case those carrying a personal guarantee may blemish only the owner’s personal score.
Diligent business owners have had trouble navigating all these variables, making it tempting to use advisory services. But owners must be cautious when seeking paid advice, as the Credit Repair Organizations Act only protects consumer credit reports against scams.
“The general attitude is that businesses can look out for themselves more than individual consumers,” says Ms. Detweiler. “But that doesn’t mean small businesses aren’t a target for potential fraud.”
Ms. Detweiler stresses that no service can guarantee a higher score. Owners should check with the Better Business Bureau before paying any credit consulting company.
Some credit bureaus, such as Dun & Bradstreet Inc., offer expedited credit-repair and credit-building services for a fee, but some of the steps the agency takes in providing those services can be done for free, by request of the business owner, experts point out.
To build business credit without paid assistance, owners should keep on top of their vendors to know if and when they submit information to the credit bureaus.
At the bank, they should negotiate for credit without a personal guarantee.
Alex Coté, spokesman for the credit bureau Cortera, says such a request will unlikely be granted if the business is too young, lacks solid credit up to that point, or has not hit at least $5 million in annual revenue. He adds, however, that owners may have luck if they “know a local community banker who will do it more on a handshake.”
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