Business Credit Scores & Reports
Strong business credit scores are the key to getting your company approved for trade credit and financing. Every business has credit scores, as well as business credit reports. In the same manner that your personal scores serve as financial ratings, your business credit scores rank the creditworthiness of your business.
Several factors go into the calculation of these figures, which can range from 0 to 100, with scores of 75 or more indicating excellent credit. Credit scores are calculated by reporting agencies such as Dun & Bradstreet and Experian.
Factors that determine business credit scores
Your business’s credit scores are calculated from various traits about your company and its financial history. Here are some of the variables:
- Credit utilization ratio
- Payment history
- Length of credit history
- Outstanding debts
- Public records, such as bankruptcies, liens and judgments
- Company size
- Industry risk
Notice that while most of the factors are similar to those used to calculate your personal credit scores, others are unique to business credit scores.
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The different business credit scores & reporting bureaus
Each bureau can have different information on file for the same person or business, and wind up producing a different score. That’s why you’ve probably noticed your score vary from bureau to bureau. Let’s take a look at 3 of the most common business credit scores & reporting bureaus:
The Dun & Bradstreet PAYDEX
According to D&B, the PAYDEX is a unique, dollar weighted indicator of a business’s payment performance based on the total number of payment experiences in Dun & Bradstreet’s file. The Dun & Bradstreet PAYDEX ranges from 1 to 100, with higher scores indicating better payment performance. PAYDEX is primarily used by vendors and suppliers to judge your business when determining what terms to extend on trade credit (e.g., net 30, net 60, etc.) Typically, the better the score, the more generous the terms extended. This is important because having more time to pay your bills can help you better manage cash flow.
|Paydex Range:||Paydex Risk Interpretation:|
|80 – 100||LOW risk of late payment
(averages prompt to 30 days within terms)
|50 – 79||MEDIUM risk of late payment
(averages 30 or less beyond terms)
|0 – 49||HIGH risk of late payment
(averages 30 to 120 days beyond terms)
|100||Payment comes 30 days sooner than terms|
|90||Payment comes 20 days sooner than terms|
|80||Payment comes on terms|
|70||Payment comes 15 days beyond terms|
|60||Payment comes 22 days beyond terms|
|50||Payment comes 30 days beyond terms|
|40||Payment comes 60 days beyond terms|
|30||Payment comes 90 days beyond terms|
|20||Payment comes 120 days beyond terms|
|1 – 19||Payment comes over 120 days beyond terms|
Intelliscore PlusSM from Experian
According to Experian, Intelliscore Plus℠ is a statistically based credit-risk score that can combine business and proprietor credit data to predict the likelihood of serious delinquency in the next 12 months. Score range from 1 to 100, where lower scores (Score Range below) indicate higher risk. Risk is very low in the first two risk classes, risk class 3 is average, and classes 4 and 5 present above-average risk levels. The Intelliscore PlusSM is regarded in the credit industry as quite predictive and economical. It incorporates statistical modeling using over 800 commercial and owner variables – including tradeline and collection information, recent credit inquiries, public filings, new account activity, key financial ratios and other performance indicators.
|Score Range||Risk Class||Risk Description|
|76 – 100||1||Low|
|51 – 75||2||Low – Medium|
|26 – 50||3||Medium|
|11 – 25||4||High – Medium|
|1 – 10||5||High|
FICO® LiquidCredit® Small Business Scoring Service℠
FICO’s Small Business Scoring Service (SBSS) rank-orders applicants by their likelihood of making payments on time. The score ranges from 0 to 300. The higher the score, the better. The scoring is based upon personal and business credit history and other financial information. A strong history of business credit with timely payments to vendors and suppliers may help boost your SBSS score. The FICO SBSS score will be used for term loans, lines of credit, and commercial loans up to $350,000 from the Small Business Administration (SBA). The minimum score to pass the SBA’s pre-screen process is currently 140.
How business credit scores are used
Lenders and other creditors need a means of determining how well your business repays debts before they will approve you for financing. This is where business credit scores come in. Higher scores indicate to creditors that your business is more trustworthy, thereby improving the odds that it can obtain financing. Lenders can check your company’s business credit reports to get more detailed information about your business’s financial history, and business credit scores serves as shorthand evaluations. The rating can also let you access more credit than you could receive when applying for financing with just your personal scores.
The importance of checking your business credit score
As a business owner, you should review your company’s financial information on a regular basis, including your business credit scores & business credit reports. Your scores are fluid and can change over time. That’s why creditors tend to assess your creditworthiness on a continual basis. If you notice your trade credit scores are low, there could be an error in the business credit reports that caused an inaccurate calculation. It is also possible that your business does not have sufficient credit history to warrant higher scores. If you do find an error, contacting the credit agency that generated the score is key to getting a correction. If there aren’t any errors, you can still improve your business’s credit scores by making on-time payments and lowering the company’s credit utilization ratio, among other options, but it will take some time.
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How can I improve my business credit score?
No doubt, understanding how and when business credit scores are used can be confusing. Luckily, keeping your scores strong is actually simple. It’s a lot like taking care of your personal credit:
- Pay your business bills on-time or before they’re due.
- Open multiple credit accounts (business credit cards, trade lines, loans).
- Keep your credit utilization around 25% (don’t max out your credit lines).
Business Credit Reports
Just as you’d view your personal credit report to check your financial history, the same information can be reviewed for your business. That’s because the minute you start a business, credit bureaus begin to develop a business credit report on your company. They do this by scouring public records and other financial data.
Then, when you receive a business loan or line of credit — sometimes called trade credit — information about your payment history is compiled by one of a few business credit reporting bureaus and providers, including Dun & Bradstreet, Experian, Equifax and FICO and turned into a business credit score.
Your business credit report only includes debts that are under your company’s federal tax identification number – also known as an employer identification number. Any personal lines of credit that you have are not listed on the report. This is true even for business credit cards that are still listed in your name.
Information that is present on your trade credit report is voluntarily sent to the reporting bureaus from the businesses that own the debt. This means some lines of credit may not be listed on the report.
When you apply for future business credit, potential creditors and lenders will view the report to determine your company’s creditworthiness. They will use the information to evaluate how well your business repays its debts, and negative marks can cause you not to get approved, or lower the amount of credit they will extend, or limit the terms under which that credit will be given.
Besides lenders and creditors, several other parties may be interested in reviewing a business credit report. Business insurance companies, for example, assess a business’s report as part of the underwriting process. Customers and other businesses that are being considered for a joint venture or partnership may also review your company’s credit history before working with your business.
Trade credit reporting is beneficial for helping you separate your business and personal finances, which is particularly advantageous in regard to credit. A business credit report offers a clear view into the financial standing of your business, providing you with a clean report of the company’s credit inquiries, lines of credit and delinquencies. This streamlined information makes it easier for fraud monitoring and for lenders to accurately assess creditworthiness (see the importance of business credit monitoring).
Furthermore, separately listing business credit information protects your personal credit standing. Your company will typically have more annual inquiries and for larger lines of credit. With combined information, these inquiries could hurt your credit score, but a trade credit report gives your business its own history to list your business’ credit activity.
Doing the right things to build your business credit profile is one of the most important items you can take as small business owner. Doing so opens up financing opportunities and business relationships that make it hell of a lot easier for you to run and grow a business.
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