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7 Steps: Improve Credit Limit Recommendations
One of the most perplexing elements of D&B's scoring and analysis continues to be their calculation of conservative and aggressive credit limit recommendations. The economy is struggling to regain momentum, and small business owners are watching the cost of doing business skyrocket, so why has D&B failed to bring the base guidelines in line to meet the demands of the current millennium?
It seems unfathomable how D&B expects small business owners to maintain a growing business based upon guidelines that have not been adjusted in more than 20 years. We have a client who came to us with credit recommendations that were lower than his company's annual budget for breakroom snacks. While we can help them improve their recommendation levels, D&B truly does need to adjust their algorithms to meet modern income and expense margins.
The discrepancy is mainly due to D&B not adjusting their algorithms to take into account today's economic environment or factor in inflation over the past two decades. While D&B will try to claim the credit limit recommendations are a reflection of the business industry or the company's creditworthiness, that kind of reasoning will no longer fly.
D&B provides credit limit guidance to companies that are interested in lending cash or extending credit to your company. While you can use these guidelines to estimate how much credit might be extended to your business or how much credit you should consider asking for, the recommendations are generally far too low to truly impact your immediate need, and certainly won't reflect your company's capability to repay the debt.
While D&B's guidelines are intended as benchmarks, they do not address whether a particular business can pay a specific amount or whether a particular customer’s total credit limit has been used. They are intended to provide a useful starting point and supplement other information credit managers are using in their analysis. Lenders will use the recommendations, but also factor in the strength of the corporate credit scores and risk ratings, the company's assets and financial statements, and historical bank records.
What factors will impact the credit limit recommendations?
The actual formula for D&B's credit limit recommendations is proprietary information, but it has evolved over their 180 year history of studying businesses, credit histories, and demographics. The recipe takes into account the following factors:
Your general industry, such as trucking, retailer, bakery, or consulting.
Your employee count, including full time, part time, independent contractors, and seasonal employees.
Your overall composite credit appraisal, determined by the historical scores and risk ratings for your business.
A comparison of your company against others in the same industry, size, and risk.
What does this mean to you?
Suppliers and creditors will leverage their criteria against either the conservative or the aggressive credit limit as a basis for determining how much credit they should extend. As was mentioned earlier, may or may not strictly adhere to these guidelines, but it gives them a safe baseline as to your company's credit potential. Since 90% of the major creditors in America rely on the D&B report when making a credit-bearing decision, it's important that the best possible information is factored into that decision.
What can you do to improve your credit limit recommendations?
Below is a list of seven steps you can take to improve your credit limit recommendations, especially if you feel that they do not accurately represent your company’s creditworthiness. While taking these actions does not guarantee D&B will adjust your credit limits up to where YOU feel they should be, the improvements to your scores and ratings will generally raise the baseline for your potential lenders and suppliers.
Always pay your bills on time, even if there is a problem with the order or an issue with the invoice. It is far easier to get a discrepancy resolved with your supplier if you have kept up your end of the payment arrangement.
If your creditors are not auto-reporting your history to D&B, purchase a service that allows you to submit them as a trade reference. A D&B agent will manually contact your supplier to verify your payment history.
Maintain complete and accurate information about your company into your D&B profile. Inaccurate, negative, or incomplete data is the number one factor for lower scores and ratings.
Be especially mindful when it comes to the SIC codes listed in your report. Since industry is the primary factor in influencing your credit limit recommendations, it's important that all SIC codes associated to your business are on file.
Include a variety of payment experiences in your D&B profile. These should include trade credit, revolving credit, secured and unsecured funding, and short term business credit (debt which is due within the next 12 months).
Don't overextend your business beyond its means. Understand that your debt to income ratios can be severely impacted, especially if you do not supplement D&B's data by submitting your annual financial statements.
Use and re-use accounts with your existing vendors, especially those you know are reporting to the bureaus. Consistency is key to expanding vendor relationships into higher limits and stronger scores.
What can we do to help?
If low credit recommendations are affecting your ability to garner credit approvals, reach out to us for assistance. In most cases, we can get you past a problem area by providing a simple tip or technique that has proven successful with our clients or other business owners.
Because we were trained by Dun & Bradstreet, we know the seventy-five factors that can impact your credit report, and we understand what actions need to be taken to offset those factors to boost your scores and ratings and get you on your way to credit approvals.
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