Mainstream Media Story Fails to Depict Key Split Between Commercial, Consumer Credit
The following is NACM’s official response to an Associated Press article about credit and small businesses that ran in several mainstream media outlets late this week:
An article from the Associated Press that ran in several news outlets, titled "How small businesses can avoid loan rejections," or some variation thereof, had good intentions and a considerable amount of important information for small businesses seeking to improve their commercial credit standing. However, while it focused on the relationship between small businesses and their banks, it completely ignored the important relationship between small businesses and their suppliers. It is this relationship that defines the commercial credit score for all businesses. Further, the article missed the fact that Dun & Bradstreet Credibility Corp. (DBCC), whose CEO provided all of the article's quotations, is a by-product of a greater problem regarding consumer and commercial credit.
The problem, in short, is that not many people recognize the vast differences between how consumer credit and commercial credit are extended, as well as how consumer creditors and commercial creditors are assessed for creditworthiness.
Regrettably the article failed to note that DBCC's primary product is a credit monitoring service which is sold to businesses for a fee. It's a carbon copy of countless other credit monitoring services offered to consumers by credit bureaus, financial institutions and other companies. While both consumers and businesses can monitor their own credit reports and address discrepancies for free, what DBCC's business model represents is an attempt to take a consumer product, and apply it in a commercial setting.
While this is logical, it's also dangerous because it further blurs the important lines separating the world of consumer credit from the world of commercial credit. If providers of commercial credit reports begin to treat the subject of their reports as though they were consumers, soon enough, legislators will, too. Any law or regulation that threatens commercial credit reports will threaten the free and open exchange of credit between businesses, ultimately exacerbating what's already a critical lack of information company creditworthiness.
There is a data vacuum that exists about businesses in this country, especially small ones. When companies consider providing goods or services to another business, they use whatever information possible to determine whether or not this potential customer will pay its bills on time. These suppliers sell on unsecured terms, meaning they often take no collateral for the goods and services they supply and are the last ones to be paid in the event of their customer's bankruptcy. This makes the financing they provide to small businesses considerably less expensive than traditional lending, and also creates a symbiotic relationship between the supplier and their business customer.
What these companies rely on most before selling to a small business is historical payment data, which answers the question "does this company pay its bills on time?" This data is included in a business' credit report and factored into their credit profile, but often there's too little information to really be of any use in making a decision, especially for small- or micro-sized businesses.
The problem is that too few companies report the payment activity of their customers to providers of commercial credit reports. This is a process that can be done electronically and anonymously, posing little risk to the company providing the information and to their customer. This lack of information sharing has created a scenario where small businesses can't even get a credit profile, let alone a bank loan, and all because no one is reporting their business' behavior.
Instead of paying a fee for a monitoring service that helps a company know and improve its credit report, the companies that sell to other businesses should be reporting their customers' payment history and accounts receivable data to the companies that create these reports. The more businesses do this, the easier it is for their business customers to create a credit profile and, hopefully, acquire more financing to expand. While some of the information in the article is useful, the piece ignores the real problem that's keeping loans out of the hands of America's job creators: the lack of available payment data.