Updated: Feb 4
You are probably familiar with the practice of "piggybacking" personal credit, but we've noticed recently that there are a lot of companies who are offering "business credit piggybacking" or "credit partner" services online, so I thought I'd better address these risky strategies right away before any of my subscribers become potential victims of this scheme.
Personal credit card piggybacking is the process of adding someone (usually a family member or friend) as an authorized user on your credit card or getting someone to add you as a user to their personal credit accounts. The goal is to use the stronger of the credit histories to help strengthen or boost the weaker, and it's usually innocent enough.
When it comes to business credit however, piggybacking or "partnering" is not just considered extremely dangerous, in some cases, it's also illegal. There have recently been a lot of cases where the piggybacker crosses the line between questionable credit-building practices and out-right bank fraud when they use false pretenses to obtain business-based credit cards or commercial loans.
BUSINESS CREDIT PIGGYBACKING
Some business owners get sucked into the piggybacking world by "virtual companies" on the web that sell “seasoned business tradelines”. It may be an appealing option for a company with little-to-no established business credit who needs to improve their current business credit profile. But... if you are considering this or other piggybacking techniques – it is a risky (and oftentimes costly) endeavor — and in more ways than one.
A “seasoned business tradeline” is a vendor or creditor account with an, older, well-established credit history. Some companies use their strong credit history as a lucrative business, selling tradelines to companies with poor or no business credit. For several thousand dollars, your company can be “piggybacked” to appear more creditworthy.
While this practice is technically not "illegal", it is frowned upon by Dun & Bradstreet, who feels this is not a true representation of how YOUR company pays its bills. Legally, D&B can't stop a business from selling or purchasing tradelines, but they can (and will) block these types of transactions from appearing in the business credit report or impacting the scores, and they are not bound to any requirement to tell you what they've done or why.
BUSINESS CREDIT PARTNERING
Even more lucrative (and more dangerous) is the practice of "credit partnering". In this scheme, a company will add a new owner, officer, or director to their company's official business registration (and then to their business credit profile), capitalizing off the higher personal FICO score of the new "partner". The goal is for the business to achieve high-dollar credit lines or funding that they can use to 1) pay an exorbitant fee back the "partner" and then 2) gain positive high-dollar payment history that can grow their business further.
While this may sound like a win-win for both the business and the partner, few ever take into consideration that there is usually a very good reason why that company (or its principals) have never been able to qualify for funding on their own. In most cases, it has very little to do with the age of the business, and more to do with poor personal credit scores, no repayment capacity, or a lack of the management skills needed to back a large loan.
"Piggybacking" and "partnering" can do irreparable harm to the business and personal credit files of everyone involved, especially if your partner is not as reputable as you might be led to believe. There are numerous cases of business owners being forced to sue to separate themselves or their businesses from "partners" due to illicit or illegal activities that were not a part of the original agreement or simply walking out on their debt altogether, leaving YOU holding the bag (and you guessed it — that bag is not full of cash!)
If Dun & Bradstreet identifies a business as being guilty of either piggybacking or partnering, the will usually remove the suspicious transactions off the report and will downgrade the scores and ratings of both businesses so neither will be creditworthy and any potential for furthering these activities will be eliminated. In most cases, D&B will place a cautionary notation in the company's file that labels the suspect business as being in "Severe Risk" status, and then will link that status to all of the company's individual principals, as well as any affiliated businesses, vendors, and even their principals.
It may not always be fair, but there is a reason that banks check business and personal credit profiles, income, payment history, and a company's repayment capability before authorizing a loan. Not only does their diligence protect the lender/creditor, but it usually also protects a borrower from financing that they may not yet be able to manage on their own.
There are lots of legitimate ways to build business credit without having to rely on risky short-term strategies that could impact your company's long-term goals. Give me a call or CLICK TO CHAT if you would like to discuss ways we can get you to your goals quickly and affordably, and using methods that won't get you in over your head!