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How Past Defaults and Collections Affect Your Business Credit Score

Getting behind on payments or having debts sent to collections can deal a major blow to your business’s credit standing. Unfortunately, these negative items don’t just automatically fall off your business credit reports after a certain period of time like they do on personal credit reports. Instead, past defaults, collections accounts, liens and judgments can stay on your business credit reports practically indefinitely.

This guide covers how these derogatory marks can impact your business’s credit scores and ability to get financing, as well as what you can do to try to remove or minimize the damage.

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The Long-Lasting Impact of Collections and Defaults

When your business fails to pay a debt as agreed, whether that’s a late payment, partial payment or no payment at all, this can result in a “default.” Defaulted debts often get turned over to collections agencies. Both defaults and collections seriously drag down your business credit scores.

For example, if your business defaulted on a loan or line of credit, this default can show up on your business credit reports for up to seven years from the date you brought the account back into good standing. But if the defaulted account never gets brought current, it can continue reporting indefinitely.

The same goes for collections accounts – they stick around on your reports until paid, settled or disputed off. And just because a collections account gets paid doesn’t mean it automatically disappears. Paid collections often still continue reporting for around seven years from the date they were originally scheduled to be paid.

In addition to defaults and collections, liens and civil judgments against your business can also weigh heavily on your business credit scores. Like collections accounts, liens and judgments generally stay on your reports until satisfied.

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The Damage Spreads to Personal Credit Reports

Business credit reporting agencies like Dun & Bradstreet, Experian Business and Equifax Small Business also share payment data with personal credit bureaus. This means late payments, defaults or other negative information on your business accounts can also sink your personal credit scores.

Plus, the various business reporting agencies update the personal credit bureaus on their reporting timelines – not the other way around. So while late payments may fall off your personal credit reports after seven years, this bad news could linger much longer on your business files.

It’s Difficult to Remove Derogatory Marks

Trying to remove negative information from your business credit reports due to inaccuracies or reporting time frame issues can also prove extremely difficult.

The Fair Credit Reporting Act – which sets laws around credit report dispute processes – applies only to consumer credit reports from Equifax, Experian and TransUnion. Business credit reports don’t have these same statutory dispute rights and procedures.

Plus, the business credit reporting agencies rely on information reported directly from various creditors and service providers – not overall consumer complaint volumes like the personal credit bureaus. This means successfully disputing and removing inaccurate information generally requires getting the reporting company itself to correct their reporting.

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You Can Try Goodwill Letters or Negotiation

If you have defaults, collections or judgments appearing accurately on your business credit reports, you may still be able to lessen their damage by reaching out to creditors and asking them to remove these accounts. This involves writing “goodwill letters” explaining the circumstances that led to your payment problems and asking the creditor to forgive the debt and stop reporting it.

Getting negative information removed through goodwill letters doesn’t always work, but it doesn’t hurt to try if you have a sympathetic case such as medical issues, client nonpayment or temporary industry disruption beyond your control.

Alternatively, you may be able to negotiate with creditors or collectors to pay less than the full outstanding balance in exchange for removing negative information from your credit reports. Debt settlement letters can be effective when the creditor likely expects little repayment otherwise.

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Just get any compromise or payment agreements in writing before sending money to ensure the collectors or creditors uphold their end of the bargain.

How to Rebuild Your Business Credit

Recovering – or building from scratch – your business credit scores after defaults and collections takes diligence and patience. But taking the right steps can help your scores gradually improve over time. It’s a marathon, not a sprint.

Start by making sure all current accounts stay in good standing to prevent further damage. Pay at least the minimums on time every month. Increase payments and pay down balances as cash flow allows.

Apply for new store, fleet or vendor accounts from companies reporting to business credit agencies and responsibly manage these accounts. Even if you need to start with small credit limits, on-time payments help demonstrate you manage credit well.

Consider adding your own positive payment history using self-reporting options from Nav or other providers. This helps counteract negative records.

Keep old accounts open rather than closing them as balances get paid off. Ongoing positive history is very valuable for credit rebuilding.

Stay persistent and consistent in paying accounts on time and pursuing removals of negative information through goodwill letters or negotiations. Even slow progress still moves you in the right direction.

Managing Through Hard Times

Having past defaults, collections and judgments appearing on your business credit reports can be discouraging. But understanding precisely how these blemishes impact your scores and ability to access financing helps you minimize the fallout.

And while negative information can take years to fade or require creditor cooperation to remove, taking the right small business credit repair steps gives you a game plan to still ultimately achieve strong scores and borrowing power. The key is patience and persistence.

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