How Business Credit Scores Work
If you’ve ever had a credit card, phone plan, auto-loan, or mortgage, you probably have a credit score. Credit scores are distributed by credit reporting bodies in order to provide lenders with information on how reliable of a borrower you are. It’s the only real way that financial institutions can assess how responsible we are with our credit. Various components contribute to a credit score: how much credit you use, if you make payments on time, if you default on your debt, and what types of credit you use. All this information is collected and an algorithm produces a credit score for you. But what about in the case of business? How do lenders know if you’re a viable borrower? They will look at your revenue and business model, but they also need to know if you have a history of being a bad debtor. This article will overview the concept of business credit scores, and provide you with the information you need to ensure that you maintain the highest possible score.
What is a Business Credit Score?
If you have a personal credit score, it will land between 0 and 850. The better of a debtor you are, the higher your score will be. In terms of business credit scores, the scale is typically between 0 and 100. The score is calculated using a range of different factors, but the exact formula will depend on the reporting body that is calculating your credit score. There are numerous reporting bodies that produce business credit scores, but two of them are larger than the rest – for the purpose of this article we will focus exclusively on them.
Reporting Bodies and Their Formulas
The main two reporting bodies are Dun & Bradstreet and Experian. These companies receive creditor information on your business and use it to produce a score that you must pay to access. With personal credit scores, only you can give someone permission to access your score. With business scores, anyone can pay a reporting body to have access to your business’ score – it is considered public information.
Dun & Bradstreet
The Dun & Bradstreet credit score consists of three different components: the PAYDEX score, the financial stress score, and the credit score. The PAYDEX score falls between 0-100 and simply tracks how often you make payments on time, the more payments you make on time, the higher your score will be. Having a PAYDEX score above 80 suggests that you are a responsible borrower who pays your bills on time. The credit score is actually provided on a scale of 1 to 5 – with 1 representing the best score. To calculate this, Dun & Bradstreet look at companies that have the same payment histories as yours and find patterns and assess the general creditworthiness of your company. The financial stress score is also given on a scale of 1 to 5 – with 1 being the best score. To calculate this, Dun & Bradstreet matches your business with other businesses that have matching financial data in order to assess the likelihood that your business will make its payments. It helps benchmark your financial standing within the context of similar businesses. To access these scores on any business you simply have to pay $61.99 to Dun & Bradstreet on their website.
Experian offers credit scores for businesses as well. They’re one of the more affordable reports, coming in at $36.95 per report. The scale of their credit score is based on the usual 0 to 100 model – with 100 being the highest score achievable. Unlike Dun & Bradstreet’s PAYDEX score, which just assesses your payment history, Experian’s credit score factors in a range of different components to give a more comprehensive understanding of your business’ health. Some of the factors that go into the Experian business credit score include: payment history, defaults, amount of credit applied for, amount of credit facilities opened, how old your business is, and the percentage of credit you use. These are just some of the various components used to calculate your score. As you can see, the more you make on-time payments and use your credit facilities responsibly, the higher your Experian credit score is likely to be.
The Benefits of a Good Business Credit Score
There are various benefits of having a good business credit score – and that’s why it is so important that you invest heavily in improving your score. The primary benefit of having a good business credit score is the increase in access to capital that you will have. The better your score, the more likely a bank will lend you money to help grow your business. In addition, they will likely lend you more money at a lower interest rate, which can save you considerable money going forward. If you do happen to run into bad times, you will also be more likely to be given money by lenders if your score is high. Also, because business credit scores are publicly accessible for a fee, potential investors in your company will be able to view your score and determine how well you have been able to run your business.
Instead of looking at your credit score as something that cannot be changed, you should approach it as an investment that takes time and money to improve. You should be willing to change your business structure to run more efficiently and improve your credit score. The downstream benefits of having a good score are endless, and can result in much larger profits via savings on interest and the ability to finance opportunities as they present themselves. It is also important to keep tabs on your credit score – many business owners make the mistake of never checking their score. The reality is that misinformation often makes its way onto scores, and it’s important to ensure you know that your score is accurate – you may be unknowingly dragged down by credit problems that shouldn’t be on your record. That’s why we suggest you check your credit score for mistakes annually.
Anne is a Senior Author for SBL. She began her career as an independent consultant for local businesses after graduating with a BA in Management. Since that time, she’s expanded to writing as well as consulting to spread helpful knowledge to small business owners across the country.