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In a perfect world, your business would have plenty of capital to pay each of its bills on time. Things, however, don’t always go as planned. When money gets tight and ends can’t quite meet, payments can fall through the cracks. But what happens next? Here’s a closer look at what collection filings and derogatory marks mean for businesses. Plus, learn how long they stay on your record, how to prevent them, and tips on getting your business credit back on track.
What does it mean to have a business debt in collections?
When you sign a contract with a lender, vendor, credit card issuer, or other type of creditor, you agree to repay the amount you borrow according to certain terms. If you fail to do so, the creditor can charge off the debt.
A charge-off means that the creditor has closed your account to future charges and written it off as a loss. At that point, they may sell the account to a debt buyer or transfer it to a collections agency.
A collections agency is a company that collects past-due debts owed to others. They often receive a commission percentage from 25% to 50%, based on the amount they collect or the original invoice amount, according to the U.S. Chamber of Commerce.
You’ll likely be aware when one of your accounts goes to collections because the agencies tend to practice aggressive collection tactics. A new account with the collection agency may also show up on one or more of your credit reports.
❗Important: While the original creditor is no longer trying to collect the payment from you, you’re still legally obligated to pay the debt.
What is a derogatory mark on a credit report?
A derogatory mark on a credit report refers to a negative item such as a late payment, a loan default, a repossession, or a foreclosure. In short, it communicates that you didn’t follow through on one of your payment agreements.
Unfortunately, derogatory marks cause your credit scores to drop and alert future creditors that you present a higher credit risk. However, they don’t stay on your reports indefinitely and tend to have a diminishing impact as time passes.
What is a derogatory public record?
Along with credit account information, credit reports typically include public records — records of incidents or actions recorded with a government agency. According to Dun & Bradstreet, they can include liens, judgments, bankruptcies, UCC filings, and business registrations. Derogatory public records are those that contain negative information such as bankruptcies and liens.
How long do collections and other derogatory marks stay on your business credit reports?
While the Fair Credit Reporting Act only allows consumer credit reporting agencies to show negative information like lawsuits, judgments, charge-offs, and collection actions for seven years, the law doesn’t apply to business debts. As a result, the business credit reporting agencies can each decide how long information stays on their reports. Here’s a look at their current reporting timeframes.
Experian
Experian provides very detailed information on its reporting time frames. You can expect the following:
- Bankruptcy filings: 10 years after the last date filed.
- Judgments: 7 years after the last date filed.
- Tax liens: 7 years after the last date filed.
- Collections: 6 years and 9 months after the last date reported.
- UCC filings: 5 years after the last date filed.
- Trade data: 36 months from the last date reported.
- Credit inquiries: 9 months.
- Bank, leasing, and government data: 36 months.
Equifax
Equifax doesn’t have much information available but does share the following for Canadian businesses:
- Credit inquiries: Two years.
- Bankruptcy filings: Five years.
- Trade data: 60 months.
- Payment data: 27 months.
It’s possible that reporting for US businesses is similar, but no guarantee.
Dun & Bradstreet
Dun & Bradstreet also shares very little information on its timeframes:
- Payment data for PAYDEX score: Two years.
- Trade data: 13 months
Can you still improve your business credit with derogatory marks?
If you have derogatory marks on any of your business credit reports, you can begin working to improve your credit history right away. While the marks will stay on your report for some time, most credit scoring models track a variety of data points.
The best thing you can do is start adding positive data to outweigh the negative. For example, make on-time payments and keep your credit utilization low. It can also help to pay off collection balances so your report shows them as paid in full. However, the collection may fall off your report after some time regardless of whether you pay, so you may want to weigh the pros and cons of paying off the balance.
A perk with business credit reports is you often don’t have to wait as long for negative information to drop off. For example, payment data with D&B drops off after just two years versus the seven-year wait with consumer credit reports. Further, a business bankruptcy filing drops off of Equifax business reports after five years, whereas it takes seven to 10 with the personal credit bureaus; seven years for a Chapter 13 bankruptcy and 10 years for a Chapter 7 bankruptcy.
If your business goes under and you start a new one, do collections and negative marks carry over?
When too much debt starts to pile up and there’s little hope of recovering, you may decide to throw in the towel. But how does that impact your future business ventures?
“When a business goes under and a new one is established, collection accounts,
bankruptcies, and negative marks from the previous business do not automatically carry over to the new entity,” says Min Hwan Ahn, attorney at the Law Office of Ahn and Sinowitz.
He adds, “However if you personally guaranteed debts for your previous business, your personal credit report may still reflect those obligations, which could impact your ability to secure financing for the new venture.”
This is a key reason to keep business and personal credit separate. If you can avoid personal guarantees, you’ll ensure that you don’t end up personally liable for business debts that can carry on long past the life of a business.
It’s also worth noting that you can’t necessarily close down a business and reopen it as a new entity solely to avoid debts. If you reopen a business that is essentially the same as your previous business, creditors can sue you for the past debts and may win — as was the case with Amjad Munim, M.D., P.A. v. Azar.
Amjad Munim, M.D., P.A. was found to have wrongfully terminated an employee (Dr. Azar) and a $288,455.67 judgment was awarded in Azar’s favor. After the verdict, Munim, P.A. closed down his practice and reopened a nearly identical one 12 days later. The new business had the same office, office equipment, furniture, medical apparatus, staff, and medical records. Dr. Azar sued the new practice for his judgment and the court determined it still had to pay.
Tips on avoiding derogatory marks and collections
Businesses facing financial trouble aren’t necessarily doomed to collections, derogatory items, and derogatory public records. “If you're late on a payment, contact your creditor! The creditor wants to avoid a lawsuit almost as much as you do,” says Scott L. Smith, Jr., Attorney at Law at Smith Law Firm.
He adds, “Just filing a petition costs a lot of money, and that's still a long way from getting a judgment. Creditors also have little to no hope of collecting the entire debt once the debtor files for bankruptcy. That gives you, the debtor, a lot of leverage for negotiating a payment plan or even a lower total payment.”
It’s in a creditor’s best interest to work with borrowers and try to figure out payment arrangements, so get in touch as soon as you foresee missing a payment.
How to rebuild and repair your business credit quickly
If you’ve already had a bad mark hit your credit report, how can you get back on track to good credit?
First and foremost, focus on making on-time payments to any business credit accounts you currently have open. Beyond that, if your credit file is thin, look into adding a new credit account.
“Every business is different, but one of the fastest ways to build or repair business credit is to use secured and unsecured credit cards. It's important to ensure payments are on time and that monthly balances are kept within the credit limit to maintain good payment history,” says Andrew Pickett, Trial Attorney at Andrew Pickett Law, PLLC.
Business credit cards, especially secured cards, are typically easier to get than other forms of credit. As a result, businesses with no credit or even bad credit can often get approved. While they’ll require you to pay a security deposit to gain access to a credit line, you can use them to establish a positive credit line and qualify for unsecured loan options in the future.
If you want to go this route, look for a business card that doesn’t require a personal guarantee and that reports to at least one business credit bureau (but preferably all three).
Pro Tip: The Tillful Card ticks all the boxes — it’s a secured business credit card that reports to all three major business credit bureaus and doesn’t require a personal guarantee. It also has a 0% APR and offers a 1% rewards rate on all purchases.
Frequently asked questions about business collections and derogatory public records
Still have questions? Browse these FAQs about business collections and derogatory public records.
How long will creditors wait before sending a business debt to collections?
The length of time creditors hold onto business debts before charging them off varies depending on the creditor, the type of account, and the repayment terms. However, they typically wait between 120 and 180 days from the first date you become delinquent, according to Equifax. During that time, they’ll likely make multiple attempts to collect the missed payments.
Do business collections affect your credit score?
Business debts in collections may affect one or more of your credit scores. It will depend on if the creditor reports to the credit bureaus and if you provided a personal guarantee on the loan.
- If you personally guaranteed the loan and the creditor reports to one or more of the consumer credit bureaus (Experian, Equifax, and TransUnion), it’ll likely appear on the credit reports from the bureaus to which it reports.
- If the loan is not personally guaranteed but the creditor reports to one or more of the business credit bureaus (Experian, Equifax, Dun & Bradstreet), it will likely appear on the reports of the bureaus to which it reports.
Do debts in collections ever go away?
While debts in collections don’t ever go away unless they’re paid off, they will eventually drop off your credit reports and hit a statute of limitations. Once the statute of limitations has passed, the creditor or collector isn’t able to take any legal action to try and force you to pay the debt. For example, in California, you have four years to file a lawsuit to collect a debt that’s based on a written agreement.
