Business Credit in the U.S.

December 22, 2009

Business Credit in the U.S.

The USA has a very advanced credit industry that provides vast amounts of data on individuals and businesses alike. As soon as an individual receives their social security number they start to build a credit history. And the same is true for business that once they start to accept or provide trade credit, information is collated on how they perform.

Information is collated by a number of business credit bureaus including Dun & Bradstreet, Experian Business, Equifax Business and Business Credit USA. They receive information from the providers of the credit using the Federal Identification Number allocated by the IRS to every business on startup. As you use more and more credit, you begin to build a picture that other lenders will use as the basis for determining whether to lend to you. So building a good credit profile in the US is, arguably, more important for a businesses in the US if it wishes to access borrowings than in Europe where there tends to be a greater reliance on financial reporting information such as report and accounts.

The data file that is collated by the agencies depends on the voluntary submission by lenders rather than a compulsory system. Therefore, the system is only as good as those that feed it - but the experience has been very good to date since many companies rely on the agency view in assessing risk.

Many small business owners in the US make the mistake of using their personal details to apply for business credit. The reason that this can be a mistake is that it puts at risk their personal rating by increasing significantly the number of checks made on their data. Analyst companies have ranges of expected activity on accounts and for consumers, due to the vast amount of data, these are very accurate. Rapidly increasing the credit checks can signal adverse activity which sends up all sorts of negative warnings.

Therefore, it is important that any business works on developing its own credit history since the purer the information over time, the better the rating and the easier it will be to get credit.

Credit history information is only one input into assessing corporate credit risk. But for trade credit it is usually the biggest single impact. When applying for larger business loans or leases, lenders will also look for detailed financial records and information to support the request. In that respect, the US market is similar to the developed Western European models for assessing credit worthiness.

The recent recession has made access to credit that much harder for all businesses - particularly smaller ones. The immediate future, although looking better now as economies come out of recession, looks to be not a great deal easier in terms of accessing credit. Companies must concentrate on managing their debts and keeping their credit records as clean as possible.

Margins charged for all lending products has increased and fees have become more commonly charged by lenders. US margins have always been higher compared to Europe, but so has the risk of corporate failure. A strong and confident business community is essential if governments are to earn money from tax take on profits.