If your business is not listed with a public exchange (NYSE, NASDAQ, ect.), then your business' financial condition is an utter mystery to your potential creditors. How are they supposed to know whether or not your company pays its bills on time? How will they know what kind of financial condition your business is in? Dunn & Bradstreet tries to illuminate this mystery, but the key word is "TRIES".
Small businesses dwell in a world of anonymity because their financial statements are not public record via the Security and Exchange Commission. This obscurity can be overcome with the help of your Dunn & Bradstreet report, but beware, this report can be a blessing and a curse. Let's examine Dunn & Bradstreet's role in the credit decision process in the context of the general factors weighed by underwriters when considering a loan approval.
Lenders crave information when making credit decisions. They love it. It makes them feel more secure. Think about it...If somebody came up to you and asked you if they could borrow $50,000, what questions would you ask this person before agreeing to loan them the money?
- What are you going to use the money for?
- How long will it take you to pay me back?
- What is your current financial condition?
- Do you have a consistent history of paying your bills on time?
The answers to these questions help make up the risk profile of your business. The first 2 questions are pure common sense and don't need any elaboration. Let's concentrate on the last 2 questions.
What is Your Current Financial Condition?
If your company is traded on a public exchange, an underwriter could simply go to Edgar Online and look up the financial statements and disclosures that your company filed with the Security and Exchange Commission. Your financial condition would be clear and an underwriter would most likely have all the information that they love and crave so much available to them with the click of a mouse. Of course, most small businesses do not report to the SEC.
So what does any of this have to do with your business? If an underwriter cannot determine your present financial condition, then your ability to repay your debt remains uncertain. Underwriters hate uncertainty with a zeal equal to or greater than their love of information. This uncertainty increases your risk profile thus raising their required return a.k.a. the interest rate that you will pay.
Let's say that you do not have financial statements available, and/or your financial condition is not what you would like it to be (ex: low profitability, little to no equity, high debt ratio, ect.). How do you overcome this challenge? Well, that leads us to our final question and to an explanation of Dunn & Bradstreet's role in the credit decision process.
Do You Have a Consistent History of Paying Your Bills on Time?
Since nobody has a crystal ball telling them with absolute certainty that you will make all future debt payments on time, the next best thing is to look at your past performance to see whether or not you have established a pattern of timely debt payments. If you can demonstrate this pattern, your loan will be far less risky in an underwriter's mind.
This is where your Dunn & Bradstreet report comes into play. Dunn & Bradstreet compiles payment history from your company's creditors in the same way that credit bureaus (Experian, Equifax, and Transunion) compile information on individuals. Dunn & Bradstreet also assigns your business a credit score just as credit bureaus assign individuals a FICO score. This score will be weighed by underwriters as they assess your risk profile.
Whether you realize it or not, your creditors may be regularly reporting your payment history to Dunn & Bradstreet. These are typically suppliers who have granted you net 30+ terms. They track late payments as well as timely payments. A favorable D&B report will certainly lower your risk profile and, at the same time, lower the interest rate that you will pay on future loans. A derogatory D&B report will have the opposite effect. This is why you should check your D&B report to make sure it is accurate.
D&B is notorious for making mistakes and posting outdated information on their reports. You may be getting declined for loans based on bad information provided by D&B without even knowing it. Since D&B is essentially a monopoly in the field of business credit reports, it is vital that your report reflects correct information.
Luckily, it is much easier to clear up errors with D&B than it is with the three major credit bureaus...so long as you have a good contact. As a small business lender, Dimension Funding has regular contact with D&B and has been able to get mistakes corrected within a few days of providing supporting documentation.
Whether you love them or hate them, Dunn & Bradstreet's monopoly on business credit reporting has solidified as credit markets have tightened. Their reports have become more relevant to assessing risk since fewer small businesses show profitability or positive equity due to the recession.
Eric JohnsonAccount Manager
Dimension Funding, LLC
Dimensionfunding.com
Phone: 949-608-2247
ejohnson@dimensionfunding.com
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