Do Business Credit Inquiries Hurt Your Company?

Has anyone ever pulled a copy of your business credit report? Did you ever wonder how those inquiries impacted your business credit scores? Would you believe some of those inquiries could actually help your business? Let's break down the different types of inquiries, what they say about your business, and test some scenarios to see whether you would extend credit to your own company if you saw what your potential creditors are seeing.

When someone pulls your business credit report, it sends a message to the credit bureaus about your business. That message may be that your business is strong and thriving and growing over time, or it could say that you're financially strained and desperate for funding. Whatever message that's being sent, it's going to impact your scores and ratings — and that will trigger a cascade of positive or negative messages that will be sent to your other (existing) creditors.

Depending on what type of inquiry is being pulled and what level of detail the inquirer is willing to pay for, it could tell the bureaus whether they are scouting you as a prospective customer, validating your ownership and location details, considering extending your company a line of credit, have already extended credit, or are worried that you might not be able to responsibly manage your financial obligations.

Commercial credit bureaus track inquiries because it says a lot about your business, and it says even more as time goes by. They'll know whether you are looking for a new supplier, growing your business based upon needs and strengths, or whether you are being "coached" in ways to fabricate the "illusion of credit" — something that could later bring harm to their larger, more valuable clients (banks, lenders, credit card processors, etc.)

DIFFERENT TYPES OF INQUIRIES (In order of cost and detail provided)

• Sales and marketing report — Identifies potential customers by industry or class

• Data validation request — Verifies data provided in a business credit application

• Credit scoring report — Provides basic scores and ratings

• Risk insight and assessment — Validates data and provides a credit risk assessment

• Investigative data request — Identifies suspicious behavior and high-risk "bad actors"

• Comprehensive report — Provides in-depth, detailed data (when available)

• Credit monitoring — Updates the inquirer anytime data, scores or ratings change

WHEN SOMEONE PULLS YOUR BUSINESS CREDIT REPORT

• To buy a copy of your business credit report, the inquirer enters your company's name, address or phone into a search engine. They are then provided a list of companies to choose from. If your company has multiple locations or duplicate reports with matching or similar data, the inquirer will have to choose which report they want to buy (and often don't want to have to pay for more than one report.)

• If the report contains solid data, scores and ratings, the inquirer is provided a copy of your report. If the data is questionable or your company hasn't yet established scores and ratings, the inquirer may be warned that there is a significant lack of data and they are given the option of cancelling the inquiry. In most instances, this generates an immediate credit application denial.

• The inquiry is then noted in your file, categorized by industry, classified according to risk, and placed into an internal tracking system.

• A link between the inquiring company and your company is generated. This link helps to insure any future transactions that get reported by the inquirer will be able to flow seamlessly into your business credit report.

• If there are other creditors who are monitoring your business credit, they will be notified (alerted) of the new inquiry.

• If you are self-monitoring your business credit, you'll also receive an alert.

HOW INQUIRIES POSITIVELY IMPACT YOUR BUSINESS CREDIT

• Unlike personal credit, most normal day-to-day business credit inquiries are not at all harmful and can actually be beneficial to your company.

• While an inquiry on your personal credit can hurt your scores, an inquiry on your business credit can sometimes provide a much-needed boost to some of the scores and ratings that typically would not be impacted by simply adding more payment history.

• Not only do inquiries create a link between your company and the inquirer, but they send a signal that your company is active and functioning, and that others are interested in doing business with your company.

• Inquiries help to verify the company name, location, phone, principals and operations of your company in each of the commercial credit bureau's databases.

• A new inquiry from a trade-based or service-based creditor sends a signal that your company is seeking products and services to meet your needs.

• Over time, multiple inquiries from the same supplier, industries or service providers help to verify what your company does, needs and uses, and that helps to validate your operations and show signs of growth and flexibility.

• Having multiple suppliers strengthens your company's capabilities (that you are not relying solely on the strength and performance of just one supplier.)

HOW INQUIRIES NEGATIVELY IMPACT YOUR BUSINESS

• Having different or inaccurate company details across several suppliers/industries signifies risk.

• Providing false or misleading details or company data that can't be readily verified signals suspicious behavior, corporate identity theft, or fraudulent/illegal activity.

• Too many inquiries all at once (especially when there have never been any inquiries in the past) sends a signal that you may be attempting to manipulate or "enhance" your credit scores and ratings.

• Multiple inquiries from certain "red-flagged" or "black-flagged" tradelines (vendors) sends a signal that you are either "being coached" or are "self-coaching" the process of building business credit scores as a means to achieve more (higher) business credit.

• Multiple inquiries from certain finance-based industries sends a signal of desperation, high financial stress, corporate identity theft, potential business failure and/or fraud.

• Finance-based inquiries with no accompanying trade-, supplier- or service-based inquiries send a signal of financial distress.

WHY BUSINESS INQUIRERS ARE ONLY IDENTIFIED BY THEIR INDUSTRY

• Unlike personal credit where the names of inquirers are released, business credit inquirers remain anonymous and are publicly identified only by their industry.

• Anonymous inquiry allows the creditor to seek specific details about your business without you being able to influence or manipulate the process.

• Many creditors do not manage their credit decisions in-house, but instead allow a third-party receivables management processor to make credit approval decisions.

• Using third-party processors allows a single agency to make credit determinations for multiple companies or departments without having to navigate data privacy concerns.

• Anonymity helps assure potential creditors that their identifying details are not being provided to any competitors who might be monitoring their client's credit file, therefore eliminating the potential for an existing creditor to threaten or manipulate the decision-making process.

• Oftentimes, business credit inquiries are generated through an automated risk management system that eliminates "human" interaction. The moment the SUBMIT button is pressed, a decision is made based upon a series of preset parameters, such as:

  • Is the business more than one year old?

  • Are all scores and ratings present?

  • Does this company have a full rating?

  • Are there any reported transactions in excess of (amount)?

  • Scores meet a threshold (Paydex over 64 or Supplier Risk of 5 or lower.

  • Are there any liens, suits, judgments or bankruptcies?

WHY A LACK OF INQUIRIES CAN HURT YOUR BUSINESS

• As I mentioned earlier, inquiries help to validate your business is active and functioning. Every business will eventually generate inquiries, whether from a phone company, bank, credit card processor or potential new contract.

• A lack of inquiries signifies there is also a lack of active operations, growth, potential, or interest in your business.

• A historical record of previous inquiries tells a potential creditor that you have been growing over time, that other companies have already reviewed your business data, and that there is a potential that other creditors have extended credit to your company, even if you have never been approved for credit in the past.

• If a potential creditor can already see prior inquiries within their same industry, they are more likely to extend credit to your company to get a piece of any future spend.

• Old inquiries drop off your business credit report after two years. A lack of inquiries sends a signal that your business is stagnant or dormant, or is not experiencing growth.

WOULD YOU EXTEND A CREDIT LINE TO YOUR OWN COMPANY?

Test your ability to determine credit capacity based upon just a few of the factors that a potential creditor or funding source might see in your own company's business credit report:

• Does your company's name, address and phone match exactly to the credit application?

• Is the credit applicant a listed business principal or officer?

• Does your company's report contain all of the required scores and ratings?

• Are your scores and ratings primarily positive or negative?

• How many payment experiences are showing in your report?

• Do you have any derogatory payments or collections in your credit report?

• What is the amount of the highest transaction currently being reported?

• Do you have any tax liens, collections or bad debts?

• What percentage of previous inquiries are finance-based?

If you have any questions about how business credit inquiries are helping or harming your business, please feel free to give me a call. I'm always happy to provide any information to help boost your credit confidence.