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The Truth About Buying a Business With Bad Credit

5 minute read

The Truth About Buying a Business With Bad Credit

Truth About Buying a Business With Bad Credit

Gerri's been guiding individuals through the confusing world of credit for 20+ years. 

Buying a business can be an exciting prospect. Someone else has already laid the groundwork, with a built-in and proven operation, including products and/or services, customers and established cash flow. It offers many benefits and opportunities.

Buying a business can also be risky – especially if you don’t look closely at what you’re actually buying. In other words, without careful and thorough due diligence, you could run into some serious problems. Levi King, co-founder of Nav, learned this lesson as a young entrepreneur who owned a commercial sign repair company in Idaho.

Less than a year after starting his business, King was doing so well that he decided to expand his services to include manufacturing. Then, a competing sign company listed for sale caught his attention. Not only did it have the assets he needed, it had been in business for 52 years. With its longevity and solid reputation, it seemed like a sure bet. He promptly bought the company’s equipment (not the entity itself) and began operating out of its location.

Shortly thereafter, King’s sign company was offered an opportunity to bid on a big job by a car dealership. It was a golden opportunity. He’d worked with them before on repair projects, but this was a $200,000 contract to build brand-new signs. Confident that his competitive price gave him an advantage, King submitted his bid.

His bid was turned down and the car dealership went with a large national business instead. Disappointed, King asked his contact at the dealership why they turned down his bid. What he learned shocked him. Apparently, the company that won the job included a copy of King’s business credit report along with their bid — which revealed negative information about his company.

King learned that somehow credit information from the company he recently purchased equipment from had gotten mixed in with his own business credit profile. The company that was awarded the job used this information against him, convincing the car dealership that King was an inexperienced kid with a shoddy credit record.

As you can imagine, King saw this as a huge wakeup call about the crucial role that credit plays in growing a successful business, as well as the need to stay vigilant for errors creeping into credit reports. He disputed the mistakes with Dun & Bradstreet and eventually separated his business’s credit from that of the business he’d purchased equipment from. Yet, it didn’t ease the pain from losing the lucrative contract.

What are business credit reports and who compiles them?

Your personal credit score tells potential lenders what kind of risk to expect if they extend you credit or financing. Low scores mean you’re high risk; higher scores mean there’s a reasonable chance that you’ll repay them promptly and in full.

A business credit score works in a similar way. A business with a record of paying its bills on time is a likelier candidate for financing, trade credit, and, in some cases, large contracts than a business that’s struggled to keep its head above water.

Business credit reports are compiled by each of the three major business credit reporting agencies: Dun & Bradstreet, Equifax, and Experian. (Other business credit reporting agencies exist, but it makes sense to focus first on the main players.)

These reporting agencies each have their own unique ways of collecting and reporting payment information. They all collect information from a variety of sources, such as banks, business credit card issuers, vendors, etc., though the exact companies they work with will often vary. As a result, business credit reports may vary widely from one credit bureau to another.

How to Check a Business’s Credit Score

When you buy a business, you commit to taking on its assets and liabilities, including problems you might not be aware of, such as unpaid bills that are being reported to the business credit reporting agencies. For this reason, you’ll want to take a close look at a business’s credit report before committing to purchasing it.

One option is to go directly to the credit reporting agencies. For example:

  • Experian’s Business Credit Advantage offers instant access to Experian business credit reports and scores, and you can check up to 30 business’s credit scores per month with a paid Business CreditScore Pro plan.
  • You can purchase reports from Dun & Bradstreet via their Credit Evaluator Plus service.
  • You can check a company’s Equifax report for by purchasing one or more reports through Equifax.

Another option is a paid account with Nav, through which you can get detailed reports on your own business and check the business credit of up to five other businesses. You’ll get monthly updates to commercial reports from Equifax, Experian and Dun & Bradstreet.

It’s important that you check multiple bureaus, because their data may be different. Acquiring a bird’s eye view of a company’s credit history will give you confidence moving forward with your purchase.

Furthermore, once you’ve acquired another business or its assets, you’ll want to check credit on a regular basis. As King experienced, the credit of the business you acquire may become part of your own business credit report. Or, the credit files of unrelated businesses can get mixed up. Other mistakes— even fraud— can occur.

Just as you work hard to build, maintain and monitor your business reputation, you want to build, maintain and monitor your business credit reputation as well. 

Gerri's been guiding individuals through the confusing world of credit for 20+ years. 
She is the author or coauthor of five books, including her most recent, Finance Your Own Business: Get on the Financing Fast Track. Gerri's widely syndicated articles are popular with consumers and business owners. She's also the Education Director for Nav, an online platform that matches small business owners to their best financing options and gives free access to personal and business credit scores.