Forbes: What Owners Should Know About Coming Changes To Business Credit

March 15, 2017

(As appeared in Forbes.)

Founders may be intimately familiar with their personal credit but less aware of their business credit. Small things have a big impact on their business financial picture and an owner’s ability to raise capital.

Levi King, the founder and CEO of Nav, is excited about helping business owners. Nav, founded in 2012, is a San Mateo-based online financing marketplace that works with more than 200,000 small businesses and 50 of the top business lenders and credit cards. Kleiner Perkins led Nav’s Series A Round and their Series B round was led by Experian.


Personal experience—moving from borrower to loan broker

King dropped out of college to start a sign manufacturing business, the first of several small businesses he owned in his 20s. He had a good accountant, paid his taxes and had healthy financials, but business credit was still hard. It was difficult to get credit and, even worse, it was difficult to figure out how credit worked.

He received funding over 30 times himself with every kind of capital from basic credit cards, lines of credit and SBA Loans, to Series A and B rounds.

In 2006, King co-founded Lendio, a high-growth loan brokerage. They scaled rapidly, but King was troubled for the business owners they couldn’t help. Thousands of customers every month, seeking and failing to secure financing, begged for insight.

Owner’s felt their businesses did not present a credit risk, but, on paper, the lending decision was still ‘no.’ Banks won’t unveil their underwriting model and owners are left mystified about what the ‘problem’ with their business credit was.

Is your business credit ‘a little bit off’?

King says businesses were often just a little bit off from securing good financing. This can mean the difference between an expensive merchant cash advance and a mid-prime or prime loan, like an SBA loan or a bank line of credit.

Many derogatory items appear on a business credit report that owners are never aware of. These include:

  • Tax liens – These are very common and often small. There may be a county or city tax the owner doesn’t know he should be paying. A tax lien on your business credit file gets you kicked out of automatic underwriting with a lender.
  • UCC filings – If an SBA Lender or equipment lender extends credit, they record a UCC filing as a lien on the collateral. This has nothing to do with whether the business is in arrears. There is no legal requirement for the lender to remove these liens if the debt has been paid. If liens like this appear on your business credit file and you do not disclose them, you may be seen as a fraud risk for failure to disclose.
  • Collections on business credit reports – Often errors appear if a similarly named business had a collections issue and derogatory comments were inappropriately applied to your file. FCRA, the Fair Credit Reporting Act doesn’t apply to businesses, and therefore there is no standard for correcting business credit.
  • Personal credit of the business owner – Owners often use personal credit cards and then pay them down. With the lag in credit reporting, if you don’t pay the cards down up to 5 days before the due date, the new balance may not be reflected before it is reported. This can create an up to 100-point difference on your credit score from say a 770 on the 25th of the month to a 670 on the 1st of the month.


Upcoming regulatory shifts may make a big difference

King says coming changes on the consumer side of credit will have a positive effect on business credit. Starting July 1, 2017, the three major credit agencies—Equifax, Experian & TransUnion—are dropping certain negative information from credit reports, including tax liens and civil judgments.

The Consumer Data Industry Association estimates that these changes could result in the removal of 96 percent of civil judgments and 50 percent of tax liens due to insufficient personal identifying information.

Nav has done their own research on the impact this change may have on business owners from the 79,522 small business owners in their network. Their study shows that 17.5 percent of small business owners have either a civil judgment or a tax lien on their personal credit report. Nearly 1 in 5 business owners stands to benefit from the coming changes in credit score rankings.


Improving your credit file with positive items

While most individuals focus on getting negative items off their credit files, I asked about getting positive information reflected.

 Much of what is reported on business credit reports is invisible to the business owner. Only those reporting your data can see your data. And, because there is no requirement to report positive data, there is no incentive for reporting it. For example, you may have paid rent religiously to your landlord for years, but it won’t show on your business credit file because they have no reason to report your positive items.

King hopes to help with this in the future. As Nav expands their product road map, they want to stay tied into their customer’s complete business picture. With the customer’s permission, they plan to be able to report positive items to a credit file as early as next year.


Do you have a complete picture of your business credit?

Removing frustration for lending and business credit comes for a more complete picture. If you keep trying to secure capital, and keep hearing no, back up and find out why.

Something very small on your business credit file could be standing in the way of something very big you are trying to do.