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A small business owner’s quick guide to credit scores

What you need to know about building and growing business credit

You can get hung up on all the hullabaloo about business credit history and credit scores. There’s a lot of jargon thrown around and everywhere you look, someone’s trying to sell you a product or service to improve your credit.

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The reason that there’s so much time and attention devoted to the subject is because a credit score is important. Absent any better way to determine a business’ creditworthiness, a business credit score is a business’ report card when it goes to borrow money from a bank or asks for beneficial payment terms from a vendor.

Here’s what you’ll learn:

  • What’s a credit score and why it matters
  • How credit scores are calculated
  • Who the major players are in the credit scoring industry
  • Which credit scores are used by the majority of banks and lenders to issue loans

What’s a credit score?

what is a credit score?
The components of a credit score

The business credit score, as a measure of risk also influences the interest rate a lender charges a borrower. It follows that a riskier borrower — a business with a low credit score — would be charged higher (worse) interest rates.


How business credit scores are calculated

How a credit score is calculated?
The business credit formula

Source

Most credit scores that individuals get are scored on a scale up to 850. Business credit scores, on the other hand, are typically graded on a scale up to 100. The same influential players in the consumer credit scoring industry compete in the business credit scoring industry. These include Experian, Equifax, and FICO. Dun and Bradstreet is one of the most influential players in determining credit scores for small and large businesses.

Business credit scores primarily look at a business’ credit history — how often a business paid its bills and loans back on time — to determine its credit score. But credit scoring for businesses doesn’t stop there. Some credit scores use up to 800 variables in their calculation. Things like whether a business’s bank account has a lien on it or the existence of pending court cases can impact credit scores.

Consequently, there’s no hard and fast formula for calculating a business credit score. The fact that there are lots of players competing in the credit scoring industry shows there are lot of different methodologies to craft credit scores. We’ll look more in depth into how the major and most popular business credit scores are calculated.


Why knowing and tracking your business score is important

smbs need good credit scores to get approved for loans
Small businesses need help with cashflow

A business credit score is used by lenders, suppliers, and other business partners to determine how likely a business is to pay back any credit extended to it. It’s a measure of *creditworthiness*. A business credit score is typically the most important data point lenders look at when determining whether or not to lend to a business.

If a business’ credit score is its key to unlock financing and trade partners, then it’s important to know how the rest of the world views your business. Is it looked at as a strong partner, likely to make its payments and not stiff a vendor? Or does it appear on shaky ground, a real risk to lend to or sell to on credit?

The best part of this game — and it is most definitely a game — is that a business score is influenceable. You can change it. It’s not a score set in stone. By changing a business’ payment behavior, a business can most definitely improve its credit score. Knowing the rules of the game will improve your chances of winning the game.


A primer on the different business credit scores

Dun and Bradstreet’s PAYDEX

Dun and Bradstreet PAYDEX credit score
D&B Paydex is one of the most used credit scores

Dun and Bradstreet is a major player in business scoring. Unlike its competitors, it doesn’t compete in the consumer credit market and instead, is entirely focused on the B2B market. Its scores are so widely used by lenders and suppliers and it takes just a quick browse of D&B’s website to see the variety of products and services it offers to small businesses and the merchants that want to do business with them.

One of the most frequently used credit scores is Dun and Bradstreet’s PAYDEX score. PAYDEX looks at a business’ last 12 months of payment history and scores a business’ payment performance from 1 to 100. A business that always pays on time will receive a score of 80. To improve a score beyond 80, PAYDEX would need to see early payment of bills. So, for example, if a certain payment cycle is every 30 days, a business would need to pay before the end of the payment cycle to get a higher score.

PAYDEX needs at least three tradelines to generate a score. That just means that a business needs to establish three or more accounts with different vendors that report to D&B. Another thing to note is that the PAYDEX score is dollar-weighted, which means that larger bills will impact the score more than smaller ones will.


Experian’s Intelliscore Plus

Intelliscore Plus credit score from Experian
Experian’s Intelliscore Plus

Credit bureau Experian is a major player in consumer credit scoring. It’s also a big daddy when it comes to business credit scores. Experian’s Intelliscore Plus crunches more than 800 variables to predict how likely a business is to become over 90 days delinquent on a bill or loan payment over the next 12 months..

Scored 1 to 100, Intelliscore Plus rates business on a percentile basis, so a score of 74 means that a business scores better than 73 percent of businesses. Depending on how small a business is, Intelliscore Plus may calculate a blended score that includes the personal credit score of a business’ owner.


Equifax business credit scores
Equifax scores consumer AND business credit

Equifax is another player active in both the consumer and business credit scoring business. Its business risk assessments use a wide variety of data sources to measure the risk of a business missing a payment.

In addition to scanning information available in public records like judgments, liens and bankruptcies, the Equifax Business Credit Report includes Equifax’s own Business Credit Risk Score and Business Failure Score. The Business Credit Risk Score wants to answer the questions a supplier or lender may face: Will I get paid? When will I get paid?

The Business Failure Score is a measure of how likely a business is to fall into bankruptcy in the next 12 months. Experian categorizes companies into 5 risk classes. The score also includes how likely a company is to go bankrupt compared to every other business that Equifax scores.


FICO’s Small Business Scoring Service

Small Business Scoring Service from FICO
FICO’s SBSS

FICO’s Small Business Scoring Service was built using the analysis of millions of contributed small business applications. The name of the SBSS credit game? Figuring out how likely a business is to make its payments on time. To do that, the SBSS looks at cash flow, revenue, D&B PAYDEX Scores and other factors. Smaller lenders don’t always have access to the data required to score small business borrowers and SBSS addresses this issue by using models built from pooled data.

SBSS is used by lenders who provide credit to small businesses (typically, loans under $1 million). Back in 2012, the Small Business Administration started using credit screening for its Small Loan Advantage program. The SBA credit scoring tools uses — you guessed it — FICO’s SBSS. Because it was designed to analyze small businesses, which frequently rely on the credit history of their owners, SBSS uses a blended score that looks at both business and personal credit. A business that has no credit history — and whose owner has perfect credit — could have a high score of 140.

Think of the SBSS as a tool that sits on top of other credit reporting agencies. Lenders have a lot of options to tweak the SBSS model by prioritizing certain data sets and credit scores. Some lenders will use Experian — others may use Equifax. SBSS will take these scores and formats into account when it spits out its score. So, SBSS scores will vary across lenders.


The most popular credit scores used by banks, lenders, and other vendors

The most popular credit scores used by banks and lenders
The most popular credit scores

There really are many different business scores. Beyond the few larger services mentioned here, there are hundreds of smaller firms that provide business credit scores. When you ask lenders, banks, and vendors, you get a feel for what types of scores they prefer. D&B’s PAYDEX is used by over 50 percent of those businesses polled and other D&B credit scores are also very popular.


You CAN improve your business credit

how credit scores can help your business
Having a good credit score helps your business

Business credit scores tell other businesses how healthy your business is. It’s your business’ report card, graded to show how likely you are to be a good customer or borrower. A good credit score is a reflection that your business is creditworthy. The best part of this is that by monitoring your credit score and being mindful of your impact on it, you can improve your business’ credit rating.

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