How Will Debt Settlements and Defaults Affect My Business Credit Reports?

Debt settlements and defaults can have a significant impact on your business credit reports and scores. As a business owner, it’s important to understand how these actions may affect your company’s ability to obtain financing or credit in the future. This article will provide an overview of business credit reporting, explain how settlements and defaults are reported, and offer tips for minimizing damage to your business credit.

What are business credit reports?

Business credit reports are maintained by commercial credit bureaus like Experian, Equifax, and Dun & Bradstreet. They provide a record of your business’s payment history, amounts owed, types of credit in use, and other details that help lenders assess your company’s creditworthiness.

Each bureau may have a separate credit file for your business. The information in your business credit reports is provided by your creditors and other companies you do business with – it’s important to check all major business credit reports periodically to ensure accuracy.

Just like with personal credit, on-time payments and low balances help demonstrate creditworthiness while late payments, defaults, and other negative marks can lower your business credit scores.

How are debt settlements reported?

Settling a business debt for less than the full balance owed is generally reported to business credit bureaus. Most creditors will update your credit report to show the account as “settled” or “settled for less than full balance.”

The original missed or late payments leading up to the settlement may still show as well. Settling can stop the accumulation of additional late fees and overlimit amounts, but it doesn’t erase the initial delinquency that led to settlement discussions.

Settlements also reduce your total balances owed, which can help improve credit utilization ratios. But the presence of a settled account on your reports indicates you were unable to repay the debt in full.

Many creditors continue to report settled accounts for up to 7 years from the date of first delinquency, as permitted by the Fair Credit Reporting Act. This means even after settlement, the account may continue to negatively impact your business credit scores for some time.

How are defaults reported?

A default occurs when you fail to make scheduled payments on a debt for an extended period of time. Each creditor has its own definition of what constitutes a default based on the number of days past due – commonly 60, 90, or 120 days late.

When an account goes into default, it’s almost always reported to business credit bureaus. The original missed payments will show along with a default status. Defaulted accounts severely drag down your credit scores.

Even after a defaulted debt is settled or discharged, the negative history remains on your credit reports for up to 7 years. Like settlements, defaults can affect your ability to get approved for new credit or financing long after the account is closed.

Can I get negative records removed?

It’s very difficult to get accurate negative records removed from business credit reports. The major credit bureaus are required under the Fair Credit Reporting Act to report complete and accurate information. If your business did not make payments as agreed or settled accounts for less than full balance, the creditors are within their rights to report this.

You can dispute inaccurate information on your business credit reports – for example, if you have evidence payments were made on time or accounts do not belong to your business. But you generally cannot dispute truthful negative records just because they are harming your credit scores.

Any promises from credit repair companies to erase all negative marks should be viewed with skepticism. Legitimate deletions of accurate information are very rare. Most negative records can only be removed by the passage of time.

How to minimize damage:

• Stay current on all accounts, even if you need to settle others. Defaulting on some debts while staying current with other creditors shows you are still trying to meet obligations.
• Maintain low revolving credit balances. High balances on remaining credit lines hurt scores.
• Avoid new credit applications until your reports stabilize. New accounts may be denied due to damaged scores.
• Continue making on-time payments once settled or defaulted accounts are closed. This helps offset negatives.
• Be upfront with creditors before accounts become delinquent. More options exist before default.
• Settle for less only as a last resort. Full payment is best if possible.
• Don’t close settled accounts until the creditor agrees to update your report.
• Rebuild credit slowly over time. The impact lessens as new positive history accumulates. But improvement takes patience.

The bottom line is debt settlements and defaults make new credit harder to obtain. Prevention is ideal, but prompt action to address delinquencies can help minimize lasting credit damage. Monitoring your business credit reports and scores lets you see negative impacts as they occur and gives you time to turn things around before your credit profile deteriorates beyond repair.