BusinessReport.com

It’s difficult to turn on the television or surf the Internet without running into some sort of advertisement regarding credit scores. While there are arguments that scoring systems range from being inaccurate at best to ethnically discriminating at worst, they continue to be part of the lending process.

Small-business owners are especially at the mercy of credit scoring. The finances of the business are frequently interwoven with the principal’s personal finances, causing a personal credit score to be affected by the financial behavior of the business. “The system is designed to penalize the small-business owner,” says Baton Rouge consultant Fred Dent, former commissioner of the Office of Financial Institutions.

Dent believes credit scores accomplish little beyond creating income for the companies that sell the reports, but says attempts to create separate reports for businesses is a step in the right direction.

One of the businesses involved in the process of creating reliable small-business credit database is Baton Rouge-based Noesis Data, an independent sales and marketing representative for Credit Bureau of Baton Rouge and its corporate partners, such as credit-reporting agency Equifax.

Another credit reporting agency, Experian, has maintained small-business credit reporting for a number of years. Equifax began working with the Small Business Financial Exchange in 2001 to incorporate small-business lenders and other creditors into a database to track how well a small business pays its debts.

The need for a separate business credit score is based on the idea that what might be considered acceptable business practices cause a significant hit to a personal credit score.

Except for the occasional cash cow, many small businesses must wait for a check from their clients or customers before they are able to pay their creditors. It is not uncommon for a business to occasionally fall 30 or 60 days behind, Noesis Data CEO Layne McDaniel says, a move that would cause a big hit on a personal report. “The fact is if you’re a consumer relying on someone to pay you to pay someone else, you’re a credit risk,” he says. Dent believes the lack of inclusion of receivables is a fundamental flaw in credit reporting.

Comparatively, a business falling behind 90 days on a payment is the equivalent of a consumer falling 30 days behind on a personal credit report. Separating the two aspects in credit reporting allows the personal credit worthiness of a principal to not be penalized for making what by all accounts is a standard business decision. “Most businesses probably don’t pay everything on time,” McDaniel says. “The severity of your score is going to be indicative of what you do outside the norm.”

Equifax’s small-business credit report formulates a score to predict the likelihood of a small business incurring more than 90 days of severe delinquency, or charge-off on financial services accounts or bankruptcy within the subsequent 12 months. The database compiles information from bank loans, credit cards and leases, as well as supplier, telephone and utility credit history and public records.

The scores in the small-business credit report range from 101 to 816, with the credit risk greater as the score increases. The score also includes an option to include the business principal’s personal credit information.

It appears that there is some work to be done in gaining market-wide acceptance for small-business credit scores. And it is unlikely they will reach the point where the score itself rates a yes or no from a potential creditor. Local relationships will do more to influence a decision than a score, says Wade Carruth, Chase Bank’s regional manager for business banking in Louisiana and Oklahoma. “It’s another tool that we use in a credit decision process, but it’s not what is used to make the decision,” he says.

Also stunting acceptance is the hesitancy of smaller lenders to get involved with sharing information with the database. The concern, McDaniel says, is that the institutions worry a larger lender will snipe their customers by offering better deals. “You don’t want to turn your customer list over to anybody,” he says.

But McDaniel champions the idea that the small-business credit reporting will prove to be beneficial for business owners looking to keep their private credit worthiness separate. “If they can get a loan in the business’s name and not have it reflected in their credit file, it’s absolutely a positive thing,” he says.