Transcript CFPB FinEx Webinar: Demystifying Business Credit January 26, 2023 Presenters: Mary Jo Halder, Career Builders Alliance, Training Institute Director; and Alan M. Ellison, CFPB, Small Business Senior Program Manager Facilitator: (Substituting for Heather Brown) Ken McDonnell, CFPB Office of Consumer Education, FinEx Program >>Mr. Ken McDonnell: Thank you for attending our webinar. We had a large number of registrants. So we want to wait a couple more minutes to give others a chance to join. So we will be beginning our program within a couple of minutes. Thank you for your patience. [Pause.] >>Mr. McDonnell: Robin, may we start our program now? >>Ms. Robin Dixon-Jefferson: Good afternoon, everyone. Thank you for joining us for this afternoon's presentation. Before we get started, I wanted to go over a few logistics. My name is Robin. I'm with the Events Management team. Joining me is also Isabel Bailey as a co-host with the Events Management team. We're here to assist you. Should you have any difficulty with your audio or any technical issues, please use the chat box, which is located on the right-hand corner of your computer screen. Click either to the host or the co-host, and one of us will assist you. Before we get started, all attendees for this event will be muted throughout the entire event. If you have questions and/or comments, we ask that you put them in the chat box where they will be monitored by the presenters for this afternoon. This session is being recorded as information to you all, and with that, I will now turn this over to Kenneth, who will officially get this program started. >>Mr. McDonnell: Thank you, Robin. May I go to the next slide, please? Thank you all. I'd like to introduce you to our presenters today. My name is Ken McDonnell, and I'm substituting for Heather Brown. She had a last-minute situation she had to attend to and asked me to step in for her. We'll also be hearing from Mary Jo Halder from Career Builders Alliance and Mr. Alan Ellison from CFPB, Small Business Senior Program Manager. Next slide, please. We'd like to start out with the disclaimer that this presentation is being made on behalf of the CFPB. It does not constitute legal interpretation, guidance, or advice of the Consumer Financial Protection Bureau. Any opinions or views stated by the presenter are the presenter's own and may not represent the Bureau's. This document was used in support of a live discussion. As such, it does not necessarily express the entirety of that discussion nor the relative emphasis of the topics therein. Next slide, please. The mission of the CFPB is we are a 21st century agency that implements and enforces federal consumer financial law and ensures that markets for consumer financial products are fair, transparent, and competitive. Next slide, please. Now we'd like to give you a little bit about CFPB's resources for adult financial education, or our FinEx program. Next slide, please. You can find resources in the FinEx program from our website at ConsumerFinance.gov/consumer-tools/educator-tools. Next slide, please. We encourage all of you who are currently enrolled in the FinEx program to please do as such. We have over 60,000 financial practitioners. We will send out email updates on research tools, webinars, and other events. This will enable you to get to know CFPB presenters and to work with your organization. You may also join and keep in touch with us through our FinEx LinkedIn discussion group and network with over 3,800 members. You see here that we are located LinkedIn.com/groups/5056623. We encourage you to join us and enjoy the conversation with your fellow financial educators. Next slide please. And from our FinEx website, which we showed earlier, which is at ConsumerFinance.gov/consumer-tools—I can't remember it now, but we'll be able to send that link out to you. You'll be able to find a link here to join FinEx. You'll see that you just have to enter your email address, and then we can get you added into our distribution list, and we will get you assigned into that. Next slide, please. This webinar is being recorded, as all of our past webinars have been recorded. You'll see the website there at the bottom of this slide, and from this site, you'll be able to access all of the other past webinars. If there's other topics that you'd like to see, please go to that first to see if that topic has been covered before. If you have a topic in mind that has not been covered before, we'd highly encourage you to reach out to us and let us know, and we will consider being able to do a webinar on that topic. Next slide, please. We also have a large number of publications that we offer for free. You can access these publications through our distribution network over in Pueblo, Colorado. You see there in bold, in green is the website, which you can go and order these publications. All the publications are free, and the shipping is free, and you can request in large quantities, as many as you would like for your purposes. May I have the next slide, please. If you have any questions about CFPB's FinEx program, please feel free to reach out to Heather Brown. Heather is the lead for the FinEx program, and you can email her at CFPB_FinEx@cfpb.gov. May I have the next slide, please. >>Ms. Dixon-Jefferson: That was the last slide. >>Mr. McDonnell: All right. Now we will turn over the program to Mary Jo Halder. She is the Training Institute Director from the Career Builders Alliance. Mary Jo leads the implementation of in-person and virtual training services offered through CBA's Training Institute in addition to managing the development and expansion of CBA's credit building curricula. Prior to joining CBA, Mary Jo taught American and International Politics at the University of Northern Iowa. She then moved to Washington, D.C., in 2014 to serve as a Kiva fellow assisting small business and entrepreneurs in crowdfunding, zero percent interest business loans. Mary Jo holds a BA in Political Science from the University of Northern Iowa and a Master of Science in Comparative Politics from London School of Economics. Mary Jo, please take it from here. >>Ms. Mary Jo Halder: All right. Well, thank you so much. Good afternoon, good morning, wherever you are. My name is Mary Jo Halder, and I'm the Training Institute Director at Credit Builders Alliance. So I'm going to tell you just a little bit more about Credit Builders Alliance first. CBA is a national membership network of more than 600 asset-building nonprofits across all 50 states, D.C., and Puerto Rico. We serve as a bridge between the nonprofit sector and the credit industry, offering technical services such as access to credit reports and credit reporting, access to capital through our CDFI intermediary CBA Fund, and capacity building for nonprofits and practitioners. Over the last 15 years, CBA has focused our attention on consumer credit building and the idea that good credit is often the foundational asset for consumers to get ahead and stay ahead. But many of our members work in small business development, lending, and counseling, and have requested more information about business credit building. We've spent the last year developing more content on this topic, and I want to thank the CFPB team for inviting us to speak on some of that today. We're not going to talk about everything related to business credit because it is a massive, highly nuanced topic, but we'll do our best to cover some of the most important elements. So I've got my own disclaimer as well. The content in this presentation should not be construed as and does not constitute legal advice on any specific matter. This information is also provided without any representation that it is complete. Today's presentation does not endorse any specific business credit products, lenders, or even credit-building strategies. Entrepreneurs should carefully consider any product or creditor before entering into any agreement. Additionally, as part of this presentation, CBA uses the terms "business" and "commercial credit" interchangeably, "counselor" rather than "coach" or "practitioner," and "entrepreneur" or "participant" to refer to someone who is receiving services. So when we talk about business credit, we're really referring to two things—a business's experience using and managing credit accounts and products and the type of credit products like credit cards and loans that a business takes out. These products are in the business's name rather than the entrepreneur's. But some lenders may ask that the entrepreneur personally guarantee the business's account. While credit cards and loans are most common, there are many other forms of business credit, including credit from vendors or suppliers or even lines of credit. Business credit can open doors to other necessary components of business development and growth. This includes short-term wants and needs, like providing options for other business credit products, acquiring equipment or inventory, hiring staff, or providing a marketing budget, or renting office space, storage or vehicles. It can also help with longer-term needs or things not initially on a business's radar. This includes setting the business's interest and insurance rates based on its risk rather than the entrepreneur's; qualifying for other business opportunities or government contracts or attracting future investment; managing working capital to respond to low business seasons or unexpected shocks like a recession or natural disaster; or even for just updating current equipment, technology, or other emerging business expenses. So why can't an entrepreneur just rely on their own personal credit? Sometimes they can, but it may not be their best choice. Building business credit allows entrepreneurs the ability to separate personal and business finances in credit. This matters because the business should be paying its expenses out of its own operating funds rather than the entrepreneur's personal accounts. This helps reduce personal risk if business slows down. If finances are merged, business struggles can impact the individual and vice versa. Having large business accounts on a personal credit report could also lead to higher debt-to-income ratios, which can lead to having personal credit needs rejected because the individual appears to be overwhelmed by debt, even though the debt truly belongs to the business rather than the individual. But building business credit is really not that straightforward. Every business is in a different stage. Some businesses are ready or close to being ready to pursue business credit earlier than others. In general, these businesses are registered or licensed generally via their secretary of state; have clear expenses like inventory, rent, or just regular ongoing purchases; want to grow; and/or they can continue to make on-time payments on existing accounts while potentially being able to take on new debt as well. But sometimes a business needs to focus on other things first before they look at credit. That doesn't mean the business won't be able to pursue business credit later. Instead, they may need to focus on some other more important steps first. An entrepreneur might have a great business idea but needs to put together a business plan and set its goals. A business does not have cash flow or cash on hand to cover monthly or revolving payments. The entrepreneur's personal credit report needs some work. Many lenders will consider personal credit score or personal financials as part of business credit applications. Since this building takes time, entrepreneurs can also work on other things such as formal registration, business plans, or gathering application materials at the same time. As personal credit scores improve with attention and care, so do options for products for the business, like with better terms and interest rates as well. And again, they want to make sure that the business itself has been more formally established or registered, as many lenders want to lend to the business, not just the individual. Likewise, conversations can help entrepreneurs think about financial information that many prospective lenders use to underwrite business credit products. So in addition to having a registered business and a business bank account, lenders might also want to see if the business has a monthly budget and profit and loss statement, monthly business debt to monthly business income statements, partly because while the business may require credit, it must also make sure it's not overextending itself and taking on too much unneeded credit up front, especially when cash flow is slow or some months are projected to be naturally leaner than others. A 12-month cash-flow projection to provide a trajectory of where the business intends to go and other just general financial documents, that can be pretty important. Some of these, businesses may have. Others, they may need to look into and see if they have around. And obviously, business's age really impacts this, as a startup is going to have much different documentation than a business that's more mature and has been around for months or even years. But these are all things that may be asked for as part of business applications. But with all that in mind, let's talk about how a business uses the credit product to actually start building its credit. So how does the business build credit? It needs a few things. Open active credit accounts, paid on time, and reported to at least one business credit bureau. These accounts are also called "trade lines." Trade lines show products a business has taken out. These can come from banks, credit unions, nonprofit lenders, and online lenders. They can also come from vendors. So vendors are people or companies that offer something for sale, like construction materials, napkins and utensils for restaurants, or even just a service like printing or shipping. Vendors are sometimes also called "suppliers," but credit building doesn't happen overnight. It generally takes some time. Why? Each month's payment helps show track record rather than just a one-time instance of an on-time payment, which demonstrates that a business is able to meet terms and agreements with its lenders or vendors and has that record of doing so consistently. But ultimately, lenders and vendors choose whether and to which credit reporting agencies, also known as the "credit bureaus," that they report. So let's break down some of the common credit reporting agencies, because this can be a little confusing, even to those of us who have been in the industry for a while. The consumer credit bureaus will accept data related to a consumer's personal liability for a debt. This includes an entrepreneur who guarantees a commercial product or who has personal liability for its repayments. Those who report consumer data have the option to report to all three of the major consumer credit reporting agencies—Equifax, Experian, and TransUnion—or only one or two or none. Reporting is generally an optional service. The commercial bureaus will accept data about a business's credit obligations, and while there are many commercial reporting agencies, Dun & Bradstreet, Equifax Business, and Experian Business Information Services are the biggest and most common. TransUnion isn't on this list because it considers itself primarily a consumer reporting agency, and it doesn't maintain a separate commercial database, so it's just a good thing to keep in mind. You're probably not going to see a TransUnion business report, but the others are fair game. So let's talk briefly about why commercial lenders would want to report business accounts to the consumer credit reporting agencies rather than or in addition to the commercial credit reporting agencies. Some smaller loans are made directly to the entrepreneur for business purposes without having a formal guarantee or even a business attached. Reporting can instead help entrepreneurs build personal credit while financing some immediate business needs, which both of them may be necessary for future business credit that the business itself wants to take out. And if entrepreneurs have signed a personal guarantee to pay commercial products, these accounts can also show up on personal reports. What does it mean to personally guarantee a product? A personal guarantor promises to pay a debt if the primary borrower, such as their business, defaults on their obligation. Think of this as having personal liability for a product. Guarantors are different than cosigners and have no claim to the asset purchase by the borrower. A personal guarantee is the guarantor's legal promise to repay credit issued to their business. In signing a personal guarantee, a borrower is agreeing that their personal assets may serve as collateral if the business defaults. Some creditors may choose to report guarantors and entrepreneurs who are personally liable for their business accounts to the consumer bureaus. Others may not. The important takeaway is that guarantors may see commercial products appear on their personal credit reports, and that can serve as a personal credit-building opportunity. And that's going to get into something we'll talk about in just a moment of why business credit building can be a little frustrating. But first, we want to take a very quick look at some common business credit-building products, though this is not an exhaustive list, by any means. However, what we want to keep in mind is that a product can only build credit if it is reported, and not all products actually are. Some are also only reported to the consumer bureaus for the guarantor. So common business credit products including credit cards, vendor credit agreements, business loans, and lines of credit all provide potential options for commercial credit building, but it ultimately depends on whether and where a creditor actually reports. Likewise, access and availability of products can also vary, so it may be a good idea to start thinking of products or lenders in your community that may be good fits for the entrepreneurs with whom you work. Some of you who are attending today may be with organizations that lend. Others might not. But there are many options out there that entrepreneurs can go to, to find different products. So we'll look at just a few right now. Banks or credit unions tend to offer secured and unsecured business products, but product sizes and rates can vary and are sometimes too large for what entrepreneurs need. If entrepreneurs already have business banking accounts with the financial institution, this may be a good place to start. Nonprofit and community lenders, including community development financial institutions, or CDFIs, often focus on underserved entrepreneurs and tend to offer business loans and lines of credit, though they may also provide commercial mortgages and even credit cards in some cases. Many also offer personal credit-building opportunities, and while there is some reasonable skepticism, licensed and reputable online lenders are getting into commercial lending, particularly with loans and credit cards. But consider reviewing online lending aggregators to check product details and read the fine print carefully just to make sure the entrepreneur really knows what they're getting into. CBA's Member Map includes all 600-plus CBA members and is searchable by location, product type, and general services. CBA members offer a mixture of credit-building services, including coaching, counseling, and lending. Some work locally, while others provide services regionally or nationally. And I'll put the link to all of this—I've got a few other links as well, but I'll put a link to all of those into the chat once I'm done, just in case you're not able to access them through the webinar link itself. But taken together, there are many available options. Not every product will be a good fit for every entrepreneur, but by building knowledge of products, which entrepreneurs may benefit from them and where to find them, you can better support business credit-building journeys. So attending webinars and reading resources that the CFPB and others in the field put out can really just help you as a whole build that knowledge because the realm of business credit and business credit reporting is very highly nuanced and complex, the same way that products are. But no matter the product, entrepreneurs need to consider risk factors and fully understand product requirements. Every entrepreneur has different needs, and product options will often vary based on specific circumstances as well as the entrepreneur's personal credit and ability to qualify for a product, which may impact product terms and rates. Entrepreneurs should carefully read the fine print to understand monthly payments, interest rates, and even whether there are penalties for prepayments. They should also check to see whether the terms address credit reporting, because at the end of the day, not all products report. That means a business product could possibly help build credit for the business or the entrepreneur or both or neither. Encourage entrepreneurs who ask lenders or vendors to confirm whether and where they report to help set credit-building expectations. But business credit building can only happen if a business account gets reported to one of the business credit bureaus. I know you've heard me say this multiple times. It is one of the key takeaways about business credit building. Unfortunately, many lenders, vendors, and other creditors decide not to report because they're generally not required to do so. Reporting can take time and money, and not all lenders want to invest in this or even believe that they can do this correctly and accurately. So what does that mean for entrepreneurs and businesses you may be supporting? If a business credit account reports to a business bureau, it can help a business build credit. If it isn't reported, it can't help build business credit, but it may still provide the financing a business desperately needs. Lenders may also decide to report to the consumer credit bureaus if the entrepreneur has signed a personal guarantee. This can provide an opportunity to build personal credit, but remember, personal credit is different than business credit. Some lenders also report to the business bureaus. Others don't. It can feel a bit like playing roulette or other games of chance, but getting credit under a business's name, even if it isn't reported, can provide additional opportunities for building up relationships with vendors and creditors, which can expand access to other business credit products down the road, including those that might be reported and really then can serve as business credit-building opportunities. So it's important to just start thinking about business credit, even if it's not reported at the end of the day. But we want to talk more about what happens when something is reported. So let's now shift into what a business report is, as business credit reports are different than personal consumer credit reports, which most people are more familiar with. A commercial or business credit report is a list of a business's reported payment and transaction information, though it often includes general information about incorporation and filings. These reports provide information about the business's recent payment actions that were reported to that commercial credit reporting agency. They also contain a business credit score summarizing its potential risk and ability to pay its obligations. Like a consumer report, a business credit report can be used to underwrite credit or insurance accounts. Businesses have multiple credit reports likely containing slightly different information based on what data commercial bureaus receive and how they process it. And I know this is a bit of a headache for everyone. It's been a headache for me the more I've learned about it. Reports don't all contain exactly the same data. But at the same time, business reports do not contain demographics or personal trade lines for any affiliated entrepreneur or employees. It's strictly about the business itself, banking information, balance sheets, and/or profit and loss statements, and the specific names of any lenders or vendors with whom the business has accounts. We're going to talk more about that in just a few minutes. Meanwhile, other information generally shows on a report. This includes business-identifying information, business credit history or summary, legal or public record information, and inquiries. Each bureau may record and reflect the data it receives in different ways. So it's a good idea to look for sample reports or even user guides from bureaus that you or entrepreneurs you work with are interested in seeing their report from. These tend to be free, online, and they can be very, very beneficial to just trying to make sense of some of the differences between what you might be familiar with on a consumer credit report and what is showing on a business credit report. So I said we'd talk more about this because this is one area that is pretty different. Names can show a bit differently on a business credit report. You generally will not see accounts reported under the lender or vendor's name. Rather, they will be reported by industry. So for example, vendor credit that comes from the "Office Master" big-box store would instead show more generally as "Office Supply Store." This is one way that reading a business credit report differs from reading a personal credit report, and it could honestly take all of us a few days to a few weeks just to talk about some of the nuance in these reports and to break down all the differences in ways that data is reflected a little bit differently than what you may be more familiar with on consumer reports. So this is another good reason to consult user guides and sample reports from the commercial credit bureaus. Again, you can generally find these on the Bureau's website. They have free sample reports and guides, and they're a great resource just because so much of this varies bureau by bureau and even report by report. So we highly recommend looking into that if you're diving into the world of commercial credit reports. Business credit history, though, is one of the most important parts of a business credit report, and it does have some overlap with information you'd see on a personal report, as it shows more about how a business is performing on its different trade lines, but it also displays information differently, particularly around delinquencies. And this is an area that does get kind of in the weeds. So we're going to give a very general overview. It's a part that, honestly, it takes hours to really talk through in detail, but we're going to give you the SparkNotes version here in the next slide. So to keep in mind, payment history is still a critical component of business credit reports because it tells more about how a business performs on its outstanding obligations, how much debt it has taken on, and how it's performing on different accounts and with whom. But if you are counseling around or reviewing commercial reports, you will need to shift perspectives on how delinquent information shows. Of particular note, the Fair Credit Reporting Act provides a 30-day window before delinquencies show on a consumer's personal credit report. That regulation only applies to consumer reports, not to business credit reports. So a business can begin showing missed payments as soon as a payment is a single day late, and we're going to look at that just in a little bit more detail because definitions can vary a little bit. But for business credit reporting, delinquency is when a business misses a payment, makes a partial payment, or pays late. Businesses may face penalties and fees and, as I just mentioned, may be reported as late if they pay even a single day after the due date. So this is on a business credit report, not a consumer credit report. Default occurs when an account is delinquent for a certain amount of time, which varies by lender. Some lenders will consider you in default if you're 90 days late, others 120, others 180 or more. Default may lead to charge-offs, collections, or other legal consequences that can spiral, but many lenders and the business credit bureaus might instead lump both these words together under the category "slow pay." Slow pay can describe paying a single day late all the way to default. Because the delinquencies can be reported as soon as the payment is missed, reach out to the lender at the first sign of trouble. Lenders are often willing to work with businesses and entrepreneurs, and because this can be confusing, I really want to reiterate this part. If there is an entrepreneur also personally liable for the account, they still have a 30-day window for when their consumer report can show delinquencies. This can be a reason creditors choose to not report or only report to the consumer bureaus or only to the commercial bureaus rather than both. It can be difficult following two sets of rules correctly. In working with entrepreneurs, then, help them understand that businesses can see impacts from delinquencies sooner than they might on consumer credit reports, but again, it's important to reach out at the first sign of trouble to avoid any slow situations for both the consumer and the business whenever possible. This is a good reminder that problems with the business can impact the entrepreneur's personal life, the same way personal financial problems can impact the business, even if they don't show on a business credit report itself. For example, if an entrepreneur pledges personal collateral against a business loan and the lender files a universal commercial code claim against that collateral, repayment problems could ultimately impact personal assets and finances, especially if the entrepreneur taps into personal finances to make payments or keep the business afloat. But just because someone runs into trouble, either personally or in their business, doesn't automatically mean that both will suffer. This is another benefit of separating personal and business finances and credit. Trouble for one doesn't necessarily mean trouble for both, but if one runs into problems, there's a chance the other could too. And when reading business reports and particularly looking at cases of slow pay, people want to know how long information stays on a business report. I wish I had a better answer for you, but the answer is it depends on the business credit bureau. Each sets their own timeline for when data will fall off. That's different than on the consumer side where there is more regulation under the Fair Credit Reporting Act. But in general, credit accounts tend to show two to three years worth of business history. Then that history falls off and is replaced with more recent payments. Public records show for closer to seven years for the business, though it often depends again on the specific type of record and the bureau itself. You can find the most up-to-date information on each bureau's websites about how long different records and how long different information will stay on business credit reports. And I think, very briefly, I saw something pop up in the chat, but let's talk about how to access reports, because this too is different from commercial reports. This might also answer a few of the questions, and I do see some notes coming in on that. But while the Fair Credit Reporting Act requires that consumer reporting agencies provide at least one free report per year, with some caveats right now due to COVID, this rule does not apply to the commercial bureaus. It is only about consumer reports, not commercial business reports. There's also no central access point for commercial reports. Instead, entrepreneurs or anyone who wants to view a report must go directly to the commercial bureaus and pay associated costs for each report they pull. This could be a one-off pull or via a subscription service. Either way, though, costs can add up, and before this question comes in, or if it hasn't, costs vary by the bureau, by the specific report and any features you want with it. So you're going to want to check that bureau's website and figure out if there's a specific report of interest because they generate all different types of reports based on industries and who may be looking at them. But we get this question a lot too of what is better, pulling a single report or looking at a subscription service. It's really going to depend on the entrepreneur and their situation. Before enrolling in a service, see what's already on a report and verify that it's correct. As trade lines are added or if the business is a little bit more mature, it might already know they have many business accounts. Enrolling in a program or paying for a package of reports over the course of a year may make more sense because there's more to keep an eye on compared to an entrepreneur who's just starting their business credit journey out. So it really kind of varies, and there are some available options that way. One other commonly asked question—and I did see one in the chat about this as well—is about Dun & Bradstreet reports. So lots of entrepreneurs have heard that they need a D-U-N-S number. One common reason was that D-U-N-S numbers used to be required for federal contracts through the government's system for award management. As of April 4th, 2022, this system no longer requires D-U-N-S numbers. Instead, it has switched to the Unique Entity ID, which is a separate identification number. The government, rather than Dun & Bradstreet, creates, manages, and owns these numbers. However, a business may still want to register for a D-U-N-S number if it wants to pull its own Dun & Bradstreet report or if someone else wants to look at the business's Dun & Bradstreet report. You need that number in order to generate a report. Businesses can register for a D-U-N-S number for free on Dun & Bradstreet's website. Since Dun & Bradstreet is the most used business credit bureau, it really can be a good idea to register for a number as soon as possible, so it's available if needed, but a business can still build credit without absolutely needing this number. Data can be reported to Dun & Bradstreet even if they haven't yet registered for it. The bigger thing is that a report just can't be pulled for their business until they have it, but not required anymore for government applications, for contracts or grants, but still can be a good idea. And a lot of people have heard of Dun & Bradstreet, so they do kind of automatically go with registering for a free number. Reports also come with business credit scores, so that's a little bit different than consumer reports where you do have to pay for a score. A score tends to be included with the business report, and a business can have multiple credit scores. Like personal scores, business scores assess risk in different ways, and lenders or others viewing scores may prioritize certain commercial bureaus in the scores that best meet their needs, so a lot of different scores out there, not just one credit business credit score. So why do scores vary? Each commercial bureau is its own independent company and generates its own scores for various needs based on the data it collects and how it weighs this information. Additionally, creditors that report choose which bureaus they report to. So one report could contain more or less data than other bureaus have, which impact scores. Likewise, scores may require a certain number of trade lines or even multiple months of activity in order to actually generate a score. It varies by bureau for all of these things and even by their different scoring models. But while personal credit scores range from 300 to 850 for the score range, business bureaus and the scoring companies, including FICO, use different scales for business data. The ranges are much lower than those for personal scores. So FICO is a player in both consumer and commercial credit scoring, and for the business side, it uses a zero to 300 business credit score scale. A good score starts at 160. Dun & Bradstreet, Equifax, and Experian all have their own scores and use the zero-to-100 scale, but a good score varies, ranging from 76 with Experian to 90 with Equifax. And I did see this one just pop up. The SBSS is one of FICO scores, but I believe they have a number of different scores just based on who is interested. But SBSS is the one of the FICO business scores That is correct. Okay. So the specifics of algorithms and business scoring models are very highly proprietary. So we don't have numerical breakdowns of what actually goes into different score calculations. I really wish we did. We get asked this a lot. We have asked the bureaus for this a lot, and they have not given it to us. But regardless. what we do know, algorithms are still designed to summarize a business's perceived risk. The models vary across bureaus. In general, different models often include the following: payment history, like account statuses, instance of slow pay, balance, and utilization; number of trade lines; length of credit history and the business's age; and risk factors like public records and even industry type as some industries are inherently riskier than others. But some commercial scores also reward businesses for additional behaviors like making payments early rather than just on time and by paying off larger amounts rather than smaller ones. Help entrepreneurs focus on the data on the report and on actionable steps to address issues rather than just zeroing in on score itself, especially knowing ranges differ between the bureaus in scoring companies and from more familiar consumer credit scores. One thing that we often say about consumer reports and consumer scores is focus on upward positive momentum rather than just on what a number is one day versus the next day versus the next day. Just focus on keeping upward trajectory, and that's going to be one of the best things and ways of shifting mentality. This can all be done through credit action planning. Help entrepreneurs assess and inventory their business credit report but also maybe their consumer credit report to get a better sense of their personal, financial, and credit situation. Identify and celebrate the good information or even the accounts that can be brought current and become positive active accounts. Understand the more challenging information and how it can be addressed, and highlight items that need to be disputed because they are, in fact, inaccurate. Identify opportunities to add affordable new accounts that can jumpstart credit building. Connect action items to an entrepreneur's goals. Make sure that the steps that you identify are realistic and aligned with what they are trying to achieve. Finally, consider how conversations around budget and cash flow for the business should go hand in hand with discussions about personal credit situations. These can be crucial for ensuring a business is able to meet existing obligations while looking at other potential credit needs and really where they're trying to go. But also help entrepreneurs understand what business credit strength means to them. It is so much more than their credit score number itself. Instead, it might be accessing products to start or grow their business, refinancing an existing product to get a better interest rate or terms, managing to get through slow or down business times without needing to tap into or deplete personal savings, or being able to access an affordable product if needed. Credit strength can also change as a business grows, develops, faces challenges, and ages, which means an entrepreneur's credit goals for their business can and likely will also change as time passes. So goals aren't stagnant. Neither is this idea of credit strength for the business. So help entrepreneurs recognize how business credit can help their business build that idea of credit strength. Link credit to their business goals in determining if they're ready to pursue business credit building, which happens as long as the product reports to the commercial bureaus. Usually, the entrepreneur will need to make multiple months of payments at minimum before seeing a score, though each commercial bureau has differing requirements. The business should aim to establish multiple trade lines as a best practice and focus on on-time payments over time. It doesn't have to happen all at once. Credit building does take time to show repetition of behavior. Finally, business credit building really—it's kind of a marathon, not a sprint, just the way consumer credit building is, and during that time, a business's goals and credit needs really can change. Entrepreneurs may be looking at many different products and lenders at different points as they seek the right product to meet their current needs and the way that credit can help them achieve those needs. So we've gone over a very basic survey of business credit today. I know I heard—or I saw in the chat somebody asked about PAYDEX, which is one of the Dun & Bradstreet credit scores, and a few other topics that are in there. We could spend hours into days into months into an entire year just trying to get through all of the nuance into this very complex topic. So if we didn't cover everything, I'm very sorry. Wish I had more time with you, but I think you all probably would be sick of me after a few hours or however long it would be. But the thing I kind of want to stress for you right now is that we at Credit Builders Alliance have been building out our resources on this, and we offer two different trainings—Credit as an Asset and Credit as an Asset: Small Business. They focus on practical, actionable steps that nonprofit practitioners can introduce into their programs to best help consumers and entrepreneurs build credit as a powerful asset to help obtain and achieve goals. While we've offered our consumer credit training for years, we've just introduced a small business-centric training last year, and it builds and expands on what we've highlighted today, including some case studies and worksheets you can use with entrepreneurs in coaching or counseling sessions. We'll be releasing on-demand versions of both Credit as an Asset and Credit as an Asset: Small Business over the next few weeks, and we'll additionally be hosting live virtual trainings in August 2023. So if these trainings are of interest to you or even your organizations as a whole, you can learn more about them, including cost, on our website, which is CBATrainingInstitute.org. But we'll also be talking more about them in our newsletter, and I'm going to put links to both of these in the chat as well. But all the information broken down on there, like I said, they'll be releasing more in the next week to two weeks. So if it's of interest, maybe revisit next week. There will be a lot more information then than there is now. But these are open to anyone, though they are most beneficial for those who work at nonprofit organizations, Tribal entities, or governmental organizations, as those are the groups that CBA really works with, especially those working directly with entrepreneurs or those who are looking to get into small business. But that's not all we're doing with these trainings. We'll also be releasing Small Business Credit 101. The entrepreneur-facing curriculum will be available in both English and Spanish and provide a presentation, discussion questions, and examples that counselors can use with entrepreneurs. Access to these resources are free for anyone who completes Credit as an Asset: Small Business. So if you take the class, you get access to these, can download them, and use them with entrepreneurs and small businesses with whom you work. But with that, I'm going to turn things over. I see a lot of questions, so we'll be happy to answer as many as we can, and I am going to put links to things in the chat. And I apologize now, as I'm just seeing, you can see the back of my very lovely orange wall that isn't covered by the back of my screen, so trying to brighten up your day just a little bit, despite all this heavy talk about business credit. So, Ken, I'm going to turn it back over to you now. >>Mr. McDonnell: Thank you Mary Jo. In the interest of time—we do have a lot of questions—I'll just throw a sampling out there at you. >>Ms. Halder: Sure. >>Mr. McDonnell: We did have a couple questions—and you did mention this—on nonprofits. Are they—do nonprofits get business credit reports? >>Ms. Halder: The same way that everybody else gets reports. Unfortunately, you have to purchase directly from the business credit bureaus. At this time, we don't know of any specific discounts that are there, unless a nonprofit is maybe looking to purchase in bulk. The bureau may be willing to give some discounts. At CBA, we offer access to discounted consumer credit reports from all three of the consumer credit bureaus. We are working on trying to get business credit reports as an option for our nonprofit members, but that does not exist yet. So unfortunately, you have to go to the bureaus and either negotiate some pricing with the business bureaus or pay one off one at a time. >>Mr. McDonnell: We have another interesting question here. Why would a lender choose not to report to a bureau? >>Ms. Halder: Yeah, that is a great question. I could talk for hours about that personally, but one of the reasons is that it does take time to report. You have to set up. You have to make sure you have the software that you need to do it. You may have to train your staff and look into any compliance, set policies and procedures, and look into things. So that's kind of more of the practical side. Cost is also a factor, just especially if you have to purchase the software that's required for credit reporting, consumer or commercial. One of the other things, though, is that there can be varying opinions from people about whether or not credit reporting is a good idea. Some people don't want to do something that could hurt an individual, even if you know somebody has always paid on time. It's that threat of harming them if they run into a bad month or something goes wrong. So some lenders, especially nonprofits or those that are a little bit more mission-focused, can be hesitant to report because that fear of hurting, even just one person, they believe is—it kind of takes precedence over any benefits that could come for reporting. Others, too, it's just that cost breakdown and knowing what all goes into it if you report you want to do things correctly. If you don't, you tend to get credit disputes, and you tend to have some pretty unhappy clients who might not want to come back to you. Credit disputes as a whole can also just be a scare tactic that lenders decide not to report because—I can speak from experience that resolving credit responding and resolving credit disputes can take a lot of time, especially when you really want to do it correctly. There's a lot of work to doing research to make sure that if there was an error, you come up with the right way of fixing it. >>Mr. McDonnell: Thank you, Mary Jo. And I'm going to have to cut us off here because we still need some time for Mr. Ellison to speak. So I'd like to thank you very much, Mary Jo, for your time. Also, by the way, everyone, yes, this has been recorded. Yes, you will be able to get the slides. And yes, you will also be able to get a transcript of this. So again, thank you very much for your time, Mary Jo. Thank you very much. And now I'd like to turn it over to my colleague, Alan Ellison. Mr. Ellison joined the CFPB as a Small Business Program Manager in 2016, following more than 30 years in commercial banking. His principal responsibilities include serving as the Bureau's subject-matter expert in small business lending, conducting market monitoring, as well as supporting rulemaking, supervising, and enforcement activities. For the Bureau's rulemaking in connection with Section 1071 of Dodd-Frank, which will create a data collection and reporting requirement for the small business lending, he serves a leadership role. His work supports the Bureau's mission of ensuring that markets for consumer financial products and services work for consumers, responsible providers, and for the economy. Alan, please take it over. >>Mr. Alan M. Ellison: Thank you. I appreciate you all inviting me to join you today, and, Kenneth, thank you for your kind of remarks. I want to talk a little bit about the perspectives of lenders, and I, for many years, ran small business lending for a large bank that was active in 26 states. In my role at the Bureau, I've been certainly very active in some of our concerns that we've had in this space, and one of the things you'll note from Mary Jo's remarks is this space in small business typically is less regulated than, for example, consumer credit and consumer lending. And you heard that, for example, with the lack of rules for commercial bureaus versus consumer bureaus, but that also extends into other areas such as Truth in Lending. I want to provide some remarks also with regard to what lenders look for, and given the bureaus are important, but there's a lot more than jus, the bureau scores in this space. And in that way, it differs from consumer lending where, you know, gee, what is the FICO score? Here, there's a lot of concern about ability to repay and the use of what's called "cash-flow analysis," which if the debt is taken on by the borrower, will they be able to make the repayments? Is it going to add value to the business, or is it going to detract from the value of the business? And so in that evaluation and understanding the business, I think there's a couple of important things that the business should develop, and those of you that are counselors can be of tremendous assistance to them such as, Do they have a concrete business plan? And if there's a business plan, do they keep it current? Do they know the direction they're going to go? Do they know what they're going to use credit for? Do they understand their expenses on a monthly basis? What are their revenues? And one of the things that you'll note when you talk to small businesses, they'll talk about their accounts receivable, but in many cases, those are things they've invoiced for, and in many cases, they may not have those accounts receivable repaid to them. And the question is, what is their real revenue? What are their assets? What are their collateral? And for the owner to understand what sort of situation that they're in. And one of the things I used to tell my lenders is not providing credit is not necessarily a bad thing because, in many cases, a business is not ready. I heard Mary Jo talk about that. Not only are they not ready, but just adding in debt to somebody may make their business situation even more tentative, less viable, and we don't want to provide credit to someone or a business if they're not able to pay it back and if it's going to make, create difficulty for them. And the thing to note is that it is very common for personal guarantees to be required in taking on small business debt. As an example of that, it is a requirement for SBA loan. That's a loan that has a guarantee for the Small Business Administration. There is a requirement for personal guarantees to be taken, and what personal guarantees mean is that the business doesn't have the resources to pay the loan back. Then they're going to go after the assets of the owner, and that could include such things as their home. And so I think it's one of—it's important for your clients to understand the implications of personal guarantees. And why do lenders take on personal guarantees is because unlike a bigger business, there's less assets and resources in the business, and by doing the personal guarantee, often they can either extend credit, provide more credit, and/or provide it at a lower rate of interest. I think it's important to also note that, generally, personal credit bureau scores are substantially more important as a lender is evaluating the business than business scores, and typically in the D&B or some of these other business bureaus, they're very thin. They have very little information in them. Perhaps they'll have some trade credit information, but as mentioned, much of their business credit, if they have any, is not reported to those entities. And many cases, the lenders are using an alternative called the "Small Business Financial Exchange," which is a consortium that exchanges credit information above—amongst small business lenders, and that information on those reports are not available to be purchased. So you can't even look at those. But it is important to make sure your personal—the personal credit is as strong as possible, and hopefully, your clients are reviewing their personal credit bureaus to make sure they're accurate. And also, if there is personal credit that they may have that they're not utilizing, that's something they may want to address. I would also urge—and there's great value—of your clients to have a relationship with a local financial institution, and that local relationship would not just be for credit but should include things like their deposit account, their checking accounts, savings accounts for the business, and other needs to be satisfied, because many lenders are concerned about, gee, do I have that kind of whole relationship? And generally, by having the deposit account, they better understand what the business is about. So I would urge that, doing business with a local community bank or a local credit union, and also when they see credit in addition to a community bank and credit union, working with the CDFI. And that provides particular benefit as many CDFIs have counseling and other services available to work with the business to help them get ready for taking on credit. So I would really urge that. Now, we at the Bureau are very concerned about some of the practices that are in this marketplace, and unfortunately, the Bureau today does not take complaints. But our colleagues at the Federal Trade Commission take complaints, for example, on abusive activity or the lack of good customer service or those sorts of things. And we review—at the Bureau, we review those complaints, and the FTC takes that through a system called "Sentinel," and one can just go on to the FTC website and submit a complaint through Sentinel. And we will get it, and we will take a look at it. I also want to make sure that it's understood that, in many cases, businesses will take on credit and they don't fully realize the terms of those relationships. They don't get, in most cases, for example, the types of disclosure that you get for a consumer loan, and that lack of good disclosure and the lack of a federal Truth in Lending requirement causes businesses and their owners to take on credit where they don't fully understand the terms. And I think it's, one, a very important aspect to make sure that the business owner understands the terms of what they're taking on. And there is substantial predatory practices in this marketplace, and we have seen many instances of credit-type products having the equivalent of APRs, average percentage rates, well in the triple digits, well over 100 percent, as well as other abusive activities as well, whether that's the terms or fees or other items, and in fact, in a number of states, usury laws don't apply in this space. And this is an area that we are concerned about and the lack of good disclosure. A couple of states, particularly New York and California, have recently enacted disclosure laws that will be helpful for businesses that are domiciled in those states, but most states do not have such requirements. I would also urge the importance of businesses separating the personal and business financials. To often, they're intermixed together, and that provides—makes it harder for the lender and certainly harder for the business owner to understand how they're performing in their role of owning a business. The lack of understanding cash flow of owners, particularly for smaller businesses, is very important. Now, the Bureau's responsibility includes the Equal Credit Opportunity Act, and that pertains to both consumer and business credit. And we do a number of things looking for disparate treatment, for example, disparate treatment of women and minorities and others. And that tends to happen, particularly in the small business space, because there's a lot of judgmental practices where, for example, whether somebody is well known to the lender or the personal biases of individual lenders can come into play. And those are matters that the Bureau does examine for, and we are in the process of about to release a rule called the "Small Business Lending Rule," also known as Section 1071, which is going to provide, similar to what occurs in the mortgage space, the collection of data with regard to the origination, the application for small business credit, and the disposition of those credit requests. And that will include capturing information for the regulators such as the CFPB to understand race and gender and ethnicity and how that enters into this lender lending, similar to what occurs in the home mortgage space. And Congress has determined that to be important for two purposes—one, for fair lending enforcement and, two, to provide information for policymakers and others to understand parts of the economy where there's a lack of small business credit. And we will be announcing that rule shortly. And we much welcome your involvement to help educate your clients about this rule once it's in place and also to advocate and provide visibility for this rule, because we think this will be a game changer to deal with abusive practices and predatory practices in this marketplace and substantial evidence of discrimination that occurs. So we very much welcome your partnership, your support for the rule, given the importance of small businesses, for developing and furthering the growth of local communities also for job creation as well. And I'm going to turn things over to Kenneth and would certainly be glad to take any questions that people have. >>Mr. McDonnell: Thank you very much, Alan. Looking through the chat, we do not have any further follow-up questions. So we do have a couple more minutes. I'd like to invite Mary Jo to make any other concluding comments. Mary Jo, do you have a moment or two to share with us? >>Ms. Halder: I do, yes. So this was all really interesting information, Alan. I know I've heard some of it before, but the field of business credit itself is just so huge and nuanced, and it's just really complex. And even a single session sometimes isn't enough to get through everything, or it leads to more questions. So all of you attending today are just doing such a huge service for the entrepreneurs you serve and the small businesses that they create for their communities and states and their families and everyone and so forth, because helping get even just a little information is going to help many, many people. And it's why we say keep building your information. Check out the CFPB resources. Check out the FTC's resources. I saw a question about disputes on there. You definitely can dispute. Check out each business credit bureau's website. They'll have more information, and sometimes the process is a lot easier than the consumer credit bureaus, because consumer credit bureau disputes involve personal ID information and things like Social Security numbers and have to follow FCRA practices, not the same in the more unregulated Wild West of commercial reporting, as Alan was alluding to. So there are definite ways out there for things like that, but keep building and growing your knowledge on this. You're more than welcome to check out CBA's resources and information, including the classes that we offer and some of the webinars we put on, but there's a lot of nuance into this field, and I'm grateful that all of you decided to take some time out of your day to join us for this. >>Mr. McDonnell: Thank you much, Mary Jo, and, Alan, thank you very much, both of you, for your time and your expertise lending to us. I would like to let all of the participants know that your questions have been recorded. Our staff here, Isabel and Robin, have downloaded all of the questions, and we will make them available to Heather who will respond to all of you. [Pause.] >>Mr. McDonnell: Here we go. Heather will respond to everyone. We'll contact Mary Jo and Alan to get the questions answered, and Heather will respond to each one of you individually with those questions. Again, I'd like to thank you all for your time, Alan and Mary Jo for your expertise, Isabella and Robin for your wonderful hosting abilities, and also to remind you that this has been recorded. We will make the recording available. We will make the slide deck available, and we will also have a transcript available of this. So again, please enjoy the rest of your day, and thank you for joining us. And stay tuned for our next webinar. Thank you.