How to Read a Business Credit Report |
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A business credit report is similar to an
individual credit report, but there are several key aspects to evaluate
more closely on a business report. First, it is essential to review the
length of credit history for the business. Second, the business's
assets and liabilities should weigh heavily on its ultimate financial
standing. Third, the expertise of the business owner, as displayed in
personal credit and a business plan, will be important factors in
deeming the business credit worthy.
Length of Credit
A business cannot have any credit until it is legally
incorporated. Therefore, a business can exist for many years in poor
financial condition prior to actually beginning a record of payment.
Furthermore, new businesses are notoriously vulnerable to market
swings. If a business has just recently incorporated, even if it has a
good record of payment thus far, it could easily lose the ability to
make payments in the future. Businesses can declare bankruptcy and
close to escape debts much easier than individuals can. As a result,
extending a loan to an infant business is far riskier than extending a
loan to a person with a short credit history.
Financial Reports
A business's assets and liabilities are clearly displayed
through a financial report. It is essential to request this when
evaluating a business's credit. This is particularly important if a
business exists with few assets. For example, many Internet businesses
lack an actual commercial space, have no machinery and no equipment.
This means, even if the business has a positive income, it has little
to fall back on in case of a slow business cycle. This can lead to
unpaid bills. This problem would be similar to finding an individual
with a very large income but no collateral or savings. If this borrower
lost his or her job, even a small payment could go delinquent.
Business Owner's Credit
If a business has been operating for decades, the credit of
the business owner himself is less important. However, if a business is
new, the financial standing of the owner is critical to understanding
the potential for the business to thrive. A business owner who is
personally approaching bankruptcy may have to forfeit a business. It is
also important to note if the owner's personal assets have been used as
collateral for the business. All of these can be signs of a business on
thin ice, and caution should be used in extending future loans.
Business Plan and Expertise
There are times when extending a loan to a less qualified
business can pay off. If you review the business plan and determine the
business owners bring quality expertise, have a sound analysis of the
market and a good investor base, you may feel the investment is not as
large a risk as it may have appeared at first blush. The importance of
the business plan cannot be underestimated. Even a long-standing
business should constantly update its plan, showing it has prospects
for growth and profit in the years ahead. Review a business plan for
solid facts, not just good ideas, before proceeding with a loan.
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