X-Banker

Credit building loophole…or sinkhole?

May 14th, 2008

By The XBanker

An entrepreneur invents a “creative” credit building strategy: will it work?

A business owner asks us: “I want to build business credit. My idea is to set up two companies, have one lend money to the other, and build credit that way. Will it work?”

Our answer:

The short answer — don’t do it.

The long answer — it’s not as easy as it sounds.

First, you will have to report the loan to Experian and/or D&B. This is not as simple as calling them and telling them you have an account you want to report. Your company will have to be approved to report, and that means going through an application and review process first. If the company that wants to report is new, it will have to establish its own business credit before it can report. You may also have to undergo a site visit, and/or reference checks. Generally, a company must have at least 500 customer files before it can report to Experian, and D&B will require a smaller company to become a subscriber before it can report.

Secondly, one loan will not make that much of a difference. Each reference helps, but a single one will not make or break your credit history. You will still need to establish additional references.

Third, the credit agencies will request information on the principal of each business. If you are the owner or co-owner of both, that information will be cross referenced.

And that leads to the big problem here: This whole arrangement can easily be considered fraudulent. Loan fraud has been a huge problem lately and lenders are being especially careful. If the credit agencies don’t flag this one as risky, a lender may catch it.

If you think building business credit is tough now, jut wait until your file has been flagged as “high risk” by the commercial credit agencies.

There are easier, more legitimate ways to build business credit. Give them a try first.

This entry was posted on Wednesday, May 14th, 2008 at 8:31 am and is filed under Alternative Financing, Business Credit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

1. The beancounter said at May 14th, 2008 at 3:45 pm

   I tried to get approved with DNB a few years ago so that I could report the payment activity for my customers but I was declined. I signed up for one of their subscription reporting services and bingo, just like that I was approved to start reporting.

2. zubispeak said at May 19th, 2008 at 2:05 pm

   Yep, there are many ways to get to the “building”…

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