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As a consumer, you probably know the importance of building and maintaining a good personal credit rating. What you might not realize is that businesses need to do the same.
While a business credit score is similar to a personal credit score, there are key differences in how the score is established. We’ll take a look at how a business credit score is built, the importance of a high score, and what you can do to make sure your business has a strong credit profile.
What is a business credit score?
When a consumer applies for credit, the lender pulls their credit rating to determine if they are a responsible borrower. A business credit score works the same way. When a business owner needs to take out a loan or open a line of credit, the lender or service provider typically checks their personal and business credit rating to determine eligibility.
Any type of business can have a business credit rating, from a sole proprietorship to a corporation with thousands of employees. The only requirement is that the business have vendors, vendors, and lenders who regularly report account activity to a commercial credit bureau.
Why is a business credit score important?
Having a good business credit rating makes it easier to obtain business financing. If you can’t get financing for your business, you’ll have to rely on your personal savings, a personal credit card, home equity, or some other method of financing. Plus, with a good business credit rating, a lender or seller may not require a personal guarantee, which means they won’t be able to take on your personal assets if you miss or miss a payment. .
Related: How to build business credit
How Business Credit Ratings Work
Business credit scores are generated by four major business credit reporting agencies: Dun & Bradstreet (D&B), Experian, Equifax and FICO. They use information such as when your business started operating, lines of credit, and payment history to calculate your business’s credit score.
Most common business credit scores generally range from 0 to 100, with the exception of FICO, which ranges from 0 to 300. A score in the top 20% of the range will generally be considered good. To make sure your business maintains a strong credit rating, make sure you pay off all of your debt on time or sooner.
How they are calculated
While the basic calculation of personal credit scores, such as FICO, is common knowledge, the credit agencies that produce commercial credit scores are more secretive. Each agency has their own formula and most do not disclose the exact details of their rating algorithm.
However, it is generally up to business credit bureaus to take into account company information, payment history, industry, credit utilization ratios, and overall financial performance when calculating. a business credit score. D&B, Experian, and Equifax also specifically collect payment data that vendors and lenders report.
How they are used
Much like personal credit scores, business credit scores are generally used to qualify businesses for financing because they represent the financial performance of a business. Sellers, lenders, and creditors will likely use a business’s credit rating to determine the risk the business poses. Plus, because anyone can view a business’s credit score, a potential customer can also check your score to determine the likelihood of being paid on time.
Common types of business credit scores
There are five common business credit scores that business owners should know: D&B PAYDEX Score, Experian Intelliscore, Equifax Business Credit and Business Failure Risk Scores, and FICO Small Business Credit Score. Scoring Service (SBSS).
Here’s how each of these partitions work.
Dun & Bradstreet PAYDEX Score
The D&B PAYDEX score ranges from 0 to 100, and a score of 80 is generally considered good.
One-off or early payments will have a positive impact on your score, while late payments will have a negative impact. Late payments of 31 to 90 days will have a greater impact than late payments of 15 to 30 days.
Use the graph below to better understand the PAYDEX score ranges.
To get a D&B PAYDEX score, you will first need to register for a DUNS number on its website, allowing your suppliers and vendors to report your payment history to D&B. If they don’t report your activity, you won’t be able to establish a PAYDEX credit score.
Intelliscore from Experian
Experian offers two different versions of the Intelliscore: Intelliscore Plus and Intelliscore Plus v2. Intelliscore Plus may include personal credit information in Intelliscore, particularly if the business is relatively new. And according to Experian, Intelliscore Plus v2 “allows you to speed up your credit decisions by accessing Experian’s wide range of business, collection, public record and firmographic data.”
Both models range from 1 to 100 and have the same risk classifications as shown below.
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Equifax Business Credit Ratings
Equifax generates two business credit scores: the Business Credit Risk Score and the Business Default Score. The business credit risk score assesses the likelihood that a business will incur a 90-day serious default or write-off within the next 12 months; the business failure score predicts the likelihood of a business going bankrupt through formal or informal bankruptcy in the next 12 months.
Both scores reflect bankruptcies, liens, judgments, on-time payment history and more. They will also show your 12 month payment trend and compare it to the industry average.
The business credit risk score ranges from 101 to 992 while the business default score ranges from 1,000 to 1,610.
FICO SBSS credit rating
Although FICO is not one of the leading business credit bureaus, it does generate one of the most common credit scores: the FICO Small Business Scoring Service (SBSS) credit score. Lenders typically use this score to qualify applicants for Small Business Administration (SBA) loans.
Scores range from 0 to 300, but you will need a minimum score of 155 to pass the SBA screening process. However, most lenders set their minimum score requirements between 160 and 165.
Unlike other business credit scores, the FICO SBSS credit score uses both personal and business information to compile the score. FICO will include personal credit information for business owners who have a 20% or more ownership, up to five people in total. FICO will also take into account the financial information of the company, such as your total turnover, number of employees, years in operation, other debts, etc.
How to Check Your Business Credit Score
Unlike personal credit scores, business credit scores are generally not free. You will need to purchase your business scores from D&B, Experian, or Equifax, or use a subscription-based business credit scoring website.
Regularly checking your business’s credit scores can help you uncover potential issues, such as a vendor accidentally reporting late payments or a case of identity theft. Corporate identity theft increased by around 258% in 2020, according to D&B data, so owners need to be vigilant.