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Updated: Feb 5, 2020
If your business is incorporated, you have an Employer Identification Number (EIN), and you’ve registered with the business credit bureaus, you’ve taken the first steps toward establishing a business credit score.
Business credit scores, also known as trade or commercial scores, are used primarily by financial institutions to whom you might apply for credit, such as banks, credit card issuers, and leasing companies. Vendors and suppliers who plan to invoice you on a Net 30 or Net 60 basis might also check your business credit score.
Just as with personal credit, your business credit score helps financial institutions and vendors assess the risk of extending credit to your company. A good business credit score can mean a lower interest rate or better terms with suppliers. A troubling score can be a bar to establishing trade relationships that may be critical to your growing business. For some lenders, extending credit to a small business is considered a medium to high risk endeavor to begin with. A negative business credit score can sound the death knell for your credit application.
Three companies calculate business credit scores: Experian, Equifax and Dun & Bradstreet. Each employs its own criteria and scoring scale. In general, however, your business’ payment history, ratio of available credit to utilized credit, age and size, are central to determining your score.
Experian gathers information from firms that have loaned your business money or extended credit. It also looks for legal filings, such as liens, judgments or bankruptcies. Background data from public records, credit card companies, collections firms, and even marketing databases are also taken into account. In addition, Experian considers information that compares your company’s payment history to that of others in your industry. Using a “statistically derived algorithm,” Experian then assigns your business a rating between 1 and 100. The higher your score, the lower the risk to potential lenders.
Dun & Bradstreet’s PAYDEX report also uses a 100-point scale in which a higher score indicates greater creditworthiness. PAYDEX represents an analysis of your company’s one-year payment history, together with a credit score and a financial stress score, calculated by Dun & Bradstreet. The company must be able to draw data from at least four vendors to develop a PAYDEX report.
Like Experian, Equifax employs such data as business demographics, public records, payment history, as well as the small business owner’s personal credit, to determine the level of risk. Among other evaluative product offerings, Equifax calculates one score for banks and another for suppliers. The Small Business Credit Risk Score for Financial Services ranges from 101 through 992, while the Small Business Credit Risk Score for Suppliers ranges from 101 to 816. A higher score on either scale is a positive for your business
Collection accounts, liens and judgments are highly damaging; bankruptcy is practically lethal. Keep in mind that negative data remains on your business credit report for a minimum of three years; nine years in the event of a bankruptcy. A feeble score can put a damper on expansion plans, at the very least, making credit more expensive than it might otherwise be. If you’re shopping for a loan in an economic downturn, a poor score might sabotage your chances altogether.
The best way to keep your score in good shape, or to improve a low score, is to make timely payments. That means not only paying loan and credit card debt on time, but also making supplier payments by or before the 30 or 60-day deadline.
Maintaining a higher ratio of available to utilized credit can also help boost your scores. Dun & Bradstreet’s website recommends keeping “debt down and revenues growing.”
Monitoring your report regularly — every quarter, ideally — is a must, according to all three reporting bureaus. Credit can deteriorate or improve in as little as three months, due to factors such as a damaging report from a vendor or a shift in the ratio of available to utilized credit.
Errors do occur, and it’s your job to make sure the data presented is accurate. Promptly report inaccuracies to the relevant bureau and provide supporting documentation. Follow through to be sure the data is corrected. Ensuring each report presents an accurate picture of your business can help smooth the path to growth and profitability.