Non-payment Hurting Your Small Business? How Reporting to Credit Bureaus Can Help
Is it possible for a small business to report non-payment to a credit bureau?Credit bureaus play a vital role in the financial system by collecting information on how individuals and businesses manage credit. The three major consumer credit bureaus in the United States are Equifax, Experian, and TransUnion. These bureaus maintain credit reports that lenders use to evaluate creditworthiness and make lending decisions.
For consumers, credit bureaus compile information like your payment history, amounts owed, credit inquiries, and types of credit. This data comes from banks, credit card companies, collection agencies, and other sources that report on consumer credit activity.
Lenders can then purchase your credit reports and credit scores from the bureaus when you apply for credit. Good credit leads to more access to financing and better terms, while bad credit score has the opposite effect.
For businesses, credit bureaus maintain business credit reports based on how companies pay their bills to suppliers and creditors. Positive payment history helps build business credit for accessing loans and credit lines. However, unpaid bills also get reported which can damage business credit. Understanding credit bureau reporting is key for any small business owner.
How Credit Reporting Works?
In United States, three main Credit bureaus Equifax, Experian, and TransUnion collect information on how businesses and individuals manage credit. They gather this data from lenders, creditors, collection agencies, and public records.
The credit bureaus compile this information into credit reports. These reports provide details on a business’s or individual’s credit history, including:
- Payment history — Records of on-time payments, late payments, non-payments, bankruptcies, etc. This makes up a significant portion of the credit score.
- Credit utilization — How much of the available credit limits are being used. Lower utilization tends to improve scores.
- Credit history length — How long credit accounts have been open. Longer histories tend to improve scores.
- New credit applications — Applying for numerous new accounts can lower scores in some cases.
- Credit mixes — Having different types of credit (credit cards, loans, etc) can help improve scores.
Lenders use these credit reports and the associated credit score when evaluating loan and credit applications. Good credit means better chances of approval and better terms.
The business credit bureaus like Dun & Bradstreet operate similarly for business credit reports. They collect data from vendors, lenders, and other sources to generate business credit reports.
What is Business Credit Reporting?
Business credit reports are records of a business’s credit history, including information about how timely they pay bills and loans. These reports are created and maintained by business credit bureaus.
The main business credit bureaus in the United States are Experian Business, Dun & Bradstreet, and Equifax Small Business. Each bureau collects data from various sources like vendors, lenders, and government agencies to build credit files on millions of businesses.
Just like with personal credit reports, business credit reports contain important details that help lenders, suppliers, and others determine the creditworthiness of a business.
This includes the business’s identifying information, a summary of open and closed accounts, any late payments, liens, judgments, and bankruptcies over the past few years.
A positive business credit report demonstrates that the business pays bills on time and manages credit responsibly. This makes others more willing to extend financing and credit.
On the other hand, negative marks on a business credit report may make it harder to get approved for business loans and lines of credit.
Maintaining accurate, up-to-date business credit reports is crucial for any small business owner. Checking the reports regularly and disputing any errors helps ensure the best possible credit profile. This access to credit can fuel growth and success.
Benefits of Business Credit Reporting
Reporting business payment information to credit bureaus can provide several key advantages for small businesses.
Access to Credit
One of the main benefits of business credit reporting is gaining access to more sources of credit. Many lenders and creditors check business credit reports from bureaus like Experian, Equifax, and Dun & Bradstreet to evaluate loan applications.
Having a positive track record of on-time payments in your business credit file makes lenders more likely to approve financing. This gives small businesses more options when seeking funding to operate, invest, or expand.
Better Loan Terms
In addition to improving approval odds, a strong business credit profile can help small companies qualify for better loan terms from lenders.
Businesses with high credit scores may get lower interest rates, larger loan amounts, longer repayment periods, and reduced collateral requirements. This makes financing more affordable and flexible for daily operations and big investments.
Increased Credibility
Reporting payment history also helps build a company’s reputation with vendors, partners, and customers. Third parties can check a business credit report and feel confident working with companies that demonstrate responsibility and reliability through their credit record. A positive credit profile boosts a small business’s credibility and trustworthiness.
When Small Businesses Can (and Should) Report Non-payment to Credit Bureaus
Business owners work hard to provide products and services to their local, online customers and clients. Unfortunately, not all customers pay their bills on time, in some case they don’t clear the debt at all.
When payments become overdue, business owners face a difficult decision on when to report the non-payment to credit bureaus.
Many small businesses wait 30 days after the due date before considering a payment late. This grace period allows for reasonable delays that may occur.
If a customer has not paid or communicated about the status of payment after 30 days, it’s reasonable to follow up and mention that continued non-payment could affect their business credit report.
After 60 days without payment or resolution, a small business may choose to report the customer’s business to credit bureaus like Experian, Equifax, and Dun & Bradstreet.
Reporting to business credit bureaus after 60 days provides time for any misunderstandings or delays to be worked out while still protecting the business from chronic late payers.
Waiting 90 days or more to report non-payment enables the customer substantial time to resolve any issues but also increases risk for the small business. Reporting earlier at 60 days strikes a balance between working with customers and upholding the standards of the business credit agreement.
Overall, small businesses should develop standard time frames for reporting non-payment based on their industry, customers, and risk tolerance. Communicating these policies provides transparency for customers entering a credit agreement.
How to Report Non-Payment?
Reporting non-payment to a business credit bureau is a straightforward process. Here are the key steps:
Gather Required Information
To report a late or non-payment, you’ll need to provide details like:
- Your business name, address, and tax ID number
- The customer’s business name, address, and tax ID number
- The original terms of payment (e.g. Net 30 days)
- Invoice numbers, dates, and amounts owed
- Copies of invoices and any correspondence requesting payment
Having this information ready will make the reporting process faster and more accurate.
Choose a Credit Bureau
The three major business credit bureaus are Experian Business, Dun & Bradstreet, and Equifax Small Business. You can report to one or multiple bureaus. Contractors, small business proprietors, and sole proprietors can use The Credit App to directly report customer defaults and nonpayment to credit bureaus.
Check if your customer already has a business credit file with the bureau. If not, you may need to provide additional details to create a new file for them.
Submit the Report
You can submit non-payment reports through the credit bureau’s website, mail, email, or fax.
Provide the required details on their standard form. Make sure your report is clear, factual, and objective. Include copies of invoices or other proof of non-payment.
After submitting, you’ll get a confirmation from the bureau. They may follow up for any missing information.
Allow Time for Processing
Once received, it takes some time for the bureau to process and verify your claim. Expect it to appear on the customer’s credit file within 30–60 days.
Monitor the account to ensure the delinquency is recorded accurately. Dispute any errors immediately.
Request Rating Downgrade
Many bureaus will automatically downgrade a business’s credit score after a delinquency is reported. But you can also expressly request they re-evaluate and lower the customer’s credit rating.
A downgrade makes it harder for the customer to get approved for financing or credit terms with other businesses. But it also pressures them to pay up to improve their rating.
Disputes and Removal Requests
If a business reports non-payment to a credit bureau, the customer has the right to dispute the report if they believe it is inaccurate or improper. Here is an overview of the dispute process:
- The customer initiates a dispute by contacting the credit bureau (Experian, Equifax, etc.) in writing and providing relevant information such as account and contact details. They should clearly explain why they are disputing the item and request an investigation.
- The credit bureau forwards the dispute to the business that reported the non-payment. The business must then conduct an investigation, review all relevant information and respond to the credit bureau with their findings within 30 days.
- If the business finds the disputed information is inaccurate, they must ask the credit bureau to remove or correct the item. If they determine the report is accurate, they must notify the bureau detailing that finding.
- The credit bureau will update the report based on the investigation results from the business. If an item is found to be incorrect or unverifiable, the bureau will remove it from the customer’s credit file.
- The customer will be notified of the investigation results. If they still don’t agree with the outcome, they have the option to add a 100-word statement to their credit file explaining their side.
- If the dispute is not resolved to the customer’s satisfaction, they can submit an appeal or complaint to the Consumer Financial Protection Bureau (CFPB). The CFPB will further investigate on the customer’s behalf.
- Credit bureaus are required by law to have dispute resolution procedures that ensure a fair and timely process. Businesses should fully cooperate with investigations and provide clear evidence to support their reporting.
What are Alternatives to Credit Reporting
Reporting non-payment to credit bureaus can negatively impact a customer’s credit score. While this is often an effective collections strategy, some small businesses prefer to avoid this route.
Here are some alternatives that don’t involve credit reporting:
1. Offer Payment Plans
Rather than immediately sending an account to collections, offer your customer a payment plan to pay off the balance over time by installment. This gives the customer a path to become current on their account while avoiding damage to their credit. Be sure payment plans are documented in writing.
2. Late Fees
Charging late fees can motivate customers to pay on time. Late fees should be outlined in your original agreement and invoice terms. Make sure late fees are reasonable and legal in your state. Send reminders before applying late fees to give customers a chance to pay.
3. Collections Agency
Hiring a collections agency transfers the burden of pursuing payment to a third party. The credit reporting agency will attempt to collect on your behalf without reporting non-payment to credit bureaus right away. Many agencies only report unpaid debts after several months of attempts to collect.
4. Legal Action
Taking legal action like filing a claim in small claims court can encourage payment. The threat of legal proceedings is often enough to get customers to pay up. However, legal action can be expensive and time consuming compared to other options.
5. Withholding Services
If you have an ongoing service contract, withholding services for non-payment may prompt the customer to pay their outstanding balance. Be sure your contract states you can pause services for non-payment. Only withhold services long enough to get paid.
Credit Reporting Strategies
Reporting non-payment to credit bureaus can be an effective way for small businesses to encourage customers to pay their bills on time. However, business owners should use this tool strategically to get the best results.
When it comes to reporting non-payment, timing is important. In general, it’s best to report an account 30 days after non-payment. This gives the customer ample time to resolve any issues and make payment before it impacts their business credit score. Reporting too soon, such as after just a few days, could seem overly aggressive.
Waiting too long, such as 60+ days, reduces the effectiveness as well. At that point, the non-payment has already affected your cash flow significantly. Reporting between 30–45 days strikes the right balance between giving some leeway and acting quickly enough to motivate payment.
In addition to when, business owners should consider how often they report non-payment. Doing so consistently with each late account is key. Sporadic or selective reporting dilutes the impact on customers.
Establishing a clear system, such as reporting any account over 30 days late on the 1st and 15th of each month, creates an expectation. Customers will know their credit will be impacted every time they pay late. This motivates them to pay on time to all vendors that report consistently.
By reporting late payments in a timely manner and doing so consistently, small businesses can use credit reporting as an effective collections tool. Strategic reporting encourages customers to pay bills on time while also protecting the business’s cash flow.
Final thought
Reporting non-payment to business credit bureaus can be a valuable tool for small businesses to maintain strong credit and incentivize customers to pay on time. However, it should be used judiciously and as part of an overall credit strategy.