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 break-room snacks. While we can help them improve their recommendation levels, D&B truly does need to adjust their algorithms and (begrudgingly) pry their way into the 21st century.
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.
The two test cases below are good examples of why the vast majority of vendors and lenders no longer heed D&B’s recommendations when assigning credit capability to their clients.
Client A has a trucking and transportation company with 30 employees and two dozen trucks on the road. He has a strong Paydex score and all of his risk ratings are in the good to fair range. His annual sales is over $3m and has been profitable for several years. His average checking account balance is mid-six-figures year-round. So why are his D&B credit limit recommendations based at $2,500 conservative to $10,000 aggressive?
D&B’s guidelines are based upon comparing historical credit usage for Client A’s business versus other businesses in the same industry and size. Even though those other businesses didn’t have as strong of a financial forecast or as profitable of a history, the effect of the comparison was skewing the recommendations in the wrong direction. We helped to strengthen his data foundation and build exemplary scores, and that held more value to his banker than the low recommendations, winning him a $300,000 line of credit and interest rates lower than the industry average.
Client B has a real estate agency with a primary headquarters location and four branch locations. When he started the credit-building process, there was no data in his file that represented $4m/year sales or $2m/year in vendor payment history. In fact, the only payment in his file was a $250 slow payment dating from the previous year. He had no D&B rating and his credit limit recommendations were non-existent. For this reason, Client B had been forced to personally guarantee every account he had ever opened and every penny of credit his company had ever achieved.
Because his D&B report had never been updated with current information, none of his historical payments were flowing into his business credit report. By working with his finance manager, we were able to engage his existing vendor payments into his D&B report and boost his scores and ratings to prove creditworthiness. Now his company is receiving offers from lenders who are anxious to add him as a customer.
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 may or may not use the recommendations, but they will certainly factor into the equation, along with the strength of the corporate credit scores and risk ratings, the company’s assets and financial statements, and historical bank records over time.
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 190 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, and seasonal employees.
Your overall composite credit appraisal, based on your historical scores and ratings.
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, creditors 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 your current recommendations 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 your industry can be a huge 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.
LESSON: If low credit recommendations are affecting your ability to garner credit approvals, use the tips above to see if they can get you past a problem area. The seventy-five factors that impact your credit report can affect it in a number of ways, and will usually impact other areas of the report, as well.