What’s a Business Credit Report and Why You Should Care

business credit report lifestyle desktop

Depending on your own personal experience, this business credit report story might sound all too familiar. A business owner goes to a bank to request a business loan, which is rejected quicker than the ink dries on the application.

Why? Because the bank checked the company’s credit by going to at least one of the major credit bureaus and researching the business’ credit score. But, wait, the business hadn’t requested a credit report for itself. That’s right. But, these guys don’t just serve the business owners, they also provide credit ratings to third parties. In order to grow their businesses, the credit bureaus are always growing their databases.

Business credit report. Hmm… it sounds serious, doesn’t it? It almost brings you back to the days of getting a report card. (For any junior entrepreneurs or entrepreneurs in training, please adjust this phrase accordingly.)

In all reality, your credit report is a tool that you can use to measure the health of your business, most specifically, in terms of how creditworthy you are in the eyes of third parties, like banks and vendors.

The minute you start talking about business credit reports, the conversation will quickly swing to the topic of credit scores. Here’s how they’re related: A credit report is a document that contains the credit score.

Going back to comparing a business credit report to a report card, your credit score is like your total grade point average, it’s the measure that sums up all the different things (key performance indicators or KPIs in business-speak) that are taken into account in to how well you’ve managed your company’s performance in terms of securing funding and paying debts.

Just like test scores, business credit scores usually are recorded on a numerical or grade scale. The lower your score or letter grade, the riskier you appear. The higher your score or letter grade, the more universities want to recruit you and possibly give you a scholarship.

But, you know what? Those honor students only tell part of the story. There’s a range of learning styles and a range of business experiences and a low credit score doesn’t have to be the end of the world or your business. It simply gives you a perspective on where you’re staring and the specific obstacles you have to face in order to promote your strengths and your creditworthiness.

Remember, Bill Gates and Steve Jobs both dropped out of college.

The factors that affect a business credit score

One of the current challenges with business credit reports is that there isn’t a single, uniform standard or algorithm for determining the actual credit score. It’s true —  it’s 2018 and there’s no prevailing benchmark.

Current methods for building business credit reports focus predominantly on liabilities, like business loans, credit cards and collections. What’s missing is a comprehensive view of both assets and liabilities.

As a result, there’s a chance that a company can be unfairly cast in a negative light — depending on the KPIs used in calculating the credit score.

Consider a business that has several outstanding invoices from some of its most dependable customers. While this business will most likely have these funds in the near future, in the meantime it might be seen as a credit risk based on these liabilities. Despite the likelihood that these invoices will be paid.

If their credit score took their proven track record with a reliable vendor into account, this company would be less likely to be seen as a risk. But, right now, this aspect of accounts receivable isn’t taken into account by traditional business credit report calculations.

In another instance, a company has an outdated collections notice referenced in their credit file. Even though the company has resolved the outstanding debt, the negative information is there until a successful appeal process leads to the removal of this data.

Each of these business owners has worked incredibly hard to build their business — only to hit a crossroads created by inadequate or inaccurate information in their business credit reports.

What PayPie is doing differently

Through our free analytics and insights, you will receive a risk score that gives you an indicator of your overall financial health. Your risk score also gives you a better idea of how other businesses and third parties and might view you.

By including variables that many other rating services leave out, like how many customers you added in the last 30 to 60 days, how many repeat customers you have and the average lifespan of your customers, we’re able to give you a more complete view of how others might evaluate you in terms of risk.

Your assessment will also help you better understand your cash flow and provides insights on how to build on your strengths and conquer your weaknesses.

Getting started is as easy as connecting your QuickBooks Online account to PayPie.* Then all you have to do is run an assessment, using the current data you’ve worked so hard to build and maintain in your accounting system.

The current business credit score landscape 

The scores and reports that old-fashioned legacy players offer are parts of much larger enterprise-level solutions. Each of these players also sells these indicators to third parties, so that these third parties can determine which businesses represent the highest and lowest levels of risk.

Earlier in this article, we mentioned that there’s no standardized method for creating a business credit report and calculating the resulting credit score. Each of the top three credit bureaus gathers data from banks, vendors, trade associations and credit card companies — information that is also verified by third parties.

Because these details are sourced and validated through third parties, there’s a greater likelihood that these reports can contain inaccuracies or mistakes. (Another reason why companies should routinely check and monitor their credit ratings.)

In fact, a Wall Street Journal survey found that nearly 25% of businesses who check their credit reports find errors or missing data that lowered their scores.

On top of this, a National Small Business Association (NSBA) survey found that 23% of businesses had a hard time trying to fix mistakes on their credit reports — meaning that efficient reporting tools are more than necessary ever before for businesses to thrive.

Which information is used most often to calculate a business credit score?

As there’s no “gold standard” — here are some of the factors that are often taken into consideration when generating a business credit score:

  • The company’s size — Newer, smaller businesses will have fewer cash reserves and a shorter track record.
  • The industry in which the business operates and the associated risks with this industry — some industries with higher risk are actually blacklisted by conventional sources.
  • Borrowing history — how often the business has used financing before, including how much was borrowed and how quickly it was paid.
    • Current levels of outstanding debt are also examined — including credit card usage.
  • Public and court records — business credit bureaus will look to see if there are records of bankruptcies, lawsuits and other liabilities.

Again, this is only a short list of variables. Did you know that there can be as many as 800 different pieces of information that go into the calculation of a standard business credit score?

How is a business credit score used?

While it may seem obvious that a business credit report and its corresponding credit score is used to help a company access financing, there are also lesser-known uses. For instance, a solid business credit rating can help a company secure better insurance rates and negotiate more favorable payment terms with vendors, suppliers and other third parties.

Additionally, having a credit score for your business is another way to show that a company’s finances are separate from the owner’s personal finances. This adds further credibility in terms of best practices and makes tax time a lot easier.

What’s the difference between a business credit report and a credit score?

We’ve alluded to this throughout the article, but now we’ll take a moment to spell it out. A business credit report (business credit file) is an assessment, based on several KPIs. A business credit score is a KPI included in the report. It’s the hero or the cool kid of the entire analysis.

In general, the established providers will let you search or even request your business credit score for free. But, they almost always charge for a full report. Sometimes you can take advantage of a promotional offer, but in most cases, you can expect to pay.

While a credit score is a helpful business metric, it’s not the only KPI you need to know. A free business assessment from PayPie lets you build a visual, easy-to-follow report created from the data you already have in your current accounting software.*

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.


Stock photo by rawpixel.com from Pexels.

Reporting, Cash Flow and Your Business’ Financial Health

business owner reviewing financial statements on a computer

While you know that financial standing of your business is important, it’s actually a pretty difficult topic to discuss. Business financial health involves all sorts of accounting and financial terms, which don’t always roll off the tips of everyone’s tongues. But, more than that, most business simply have no idea where to start.

Rather than waiting until you have a cash flow crisis, using insights and analysis can help you better understand the financial health of your business.

What is business financial health and how do you measure it? 

Like 64.4% of businesses, you use accounting software to help keep your finances on track financial health by systematically recording your income and expenses and other crucial data. In turn, this information becomes the foundation for key financial statements, like your balance sheet, profit and loss statement and cash flow statement.

Why should you routinely review your business’ financial statements?

According to Mike Kappel, CEO of Patriot Software, the best way to measure success is to look at your financial statements. “Measuring business performance means checking out the money flow (cash flow) of your business. If you want to see how profitable your business is, check out the financial statements.”

The challenge with financial statements…

While most business owners recognize the significance of reviewing their financials, business coach Adam Sonnhalter notes that he and his business partner have seen “Grown, husky men cry when we ask them to tell us what they see on their financial statements and tell us what the numbers mean.”

The difference between financial statements and financial reports

In truth, the terms are often used interchangeably. However, in the world of business accounting, there are inferred differences.

  • Financial statements are often considered internal documents intended for stakeholders within the business itself.
  • Building upon, summarizing and visualizing the data from within the business statements, a financial report (business assessment) is most often used to quantify or substantiate the business’ performers to external stakeholders, like lenders.

Financial assessments and analysis bridge the gap between having the numbers in hand and actually having a handle on what they really mean. When financial insights are presented in a clear, concise report, it’s easier for business owners to see what these numbers are telling them about the financial health of their company.

Although in a textbook sense, reports have traditionally been used to provide information to third-parties, the financial analysis and insights within the reports are also highly valuable to the businesses themselves. After all, you can’t make informed decisions if you don’t have the right information in the first place.

Putting all the pieces together

In order to get the information you need to measure your company’s financial health, you need to know what you’re looking for, where to find it and what it all means.

The four main indicators of a business’ financial health

In an article written for Investopedia, contributor J.B. Maverick writes that liquidity, solvency, profitability and operating efficiencies are the four main areas that should be examined to determine a business’ overall and long-term financial health.

  • Liquidity — The amount of cash or assets easily convertible into cash that a company has available in order to meet short-term obligations.
  • Solvency — A company’s ability to meet long-term payment responsibilities.
  • Operating efficiency — A measure of how much profit the company makes with each transaction, once the cost of production or providing the services is accounted for.
  • Profitability — Put simply, this is whether or not the company is making money.

Your financial statements — what they are and what they tell you

There are three financial statements that a business should produce and review on a regular basis for the data needed to measure financial health and inform better decision making in relation to your financial health.

A balance sheet (statement of financial worth or statement of net worth) compares a company’s assets to its debts detailing what it owns versus what it owes. Assets are listed in order of liquidity (how quickly they can be converted to cash) while liabilities are listed in the order in which they’ll be paid.

A balance sheet is often described as a “snapshot” of one particular point in time in company’s financial history. The date at the top of the balance sheet tells you the period of time (year, quarter or month) for which the information applies.

A business’ working capital ratio (assets divided by liabilities) is derived from the information provided in the balance sheet.

balance sheet

While a balance sheet shows how well a business is managing its liabilities, a profit and loss statement (P&L statement, income statement or statement of operations) tracks revenues, costs and expenses over a quarter or fiscal year, providing measures of profitability.

Answering the question, “Is this business profitable?” — a P&L statement starts with top-line revenue items from which the costs of doing business, such as costs of goods and services (COGS), taxes and other operating expenses are deducted. The resulting amount is the famous “bottom line.”

Gross profit margin (gross profit divided by revenues), operating profit margin (operating earnings divided by revenue), net profit margin (net profit divided by revenue) and operating ratio (operating expenses divided by net sales) are generated from a business’ P&L statement.

profit and loss statement

A cash flow statement (statement of cash flow) is the third document in this trifecta. By comparing metrics from a business’ operations, purchasing and borrowing activities (merging the balance sheet and P&L statement) it shows where a company’s money comes from and where it’s going (or has gone).

A company’s cash flow ratio (operational cash flow or free cash flow) represented as the operating cash flow divided by current liabilities is considered a measure of operational efficiency and solvency.

The difference between cash flow and profitability

Cash flow and profit are not the same things. This is because unlike the balance sheet and P&L statement, a cash flow statement doesn’t account for future funds coming in or out of the business as credit, such as paid or unpaid invoices.

It’s possible for a business that’s profitable to have limited cash flow, especially if a business’ inventory, accounts receivable or fixed assets are growing rapidly. Unlike Fortune 500 companies with large cash reserves, independently owned businesses are more likely to reinvest their funds into their business — as a result, they are also more likely to be cash poor.

What financial reporting can tell you about your business’s financial performance

A financial report takes the information in a business’ financial statements and translates them into analysis and insights. A business assessment, like the one generated by PayPie, puts your cash flow, debts, assets and other factors related to financial health front and center.

The assessments we generate are a visual way to help you understand the metrics that matter most to your business’ financial health. In your report, you’ll find charts, graphs and other breakdowns that help give you the big picture of what you need to know in order to make the right decisions for your business.

How does it work? Simply sign up for PayPie, connect your accounting software to use your current financial information and you’re ready to go.* You may also run an assessment as often as you like — free of charge — to help you start building a history of your progress.

Ready to improve your business’ financial health? Then click here and get started now!

*PayPie currently integrates with QuickBooks Online. Additional integrations are coming soon.

This article is intended to be informational only and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.


Stock photo from Pexels.