If you are a business owner, or if you’re responsible for a company’s financial affairs, you know the importance of a strong credit rating from the business credit bureaus. These bureaus collect information about your company from a variety of sources and compile reports, which they then sell to interested parties. Most sales are to lending institutions, to whom you may have applied for a business loan. Other interested parties may include potential vendors, potential clients, and potential partners.
Business credit reports can contain a wealth of information — depending on how thorough the credit bureau was in compiling the report — and a lending institution or other party will be able to draw its own conclusions about your creditworthiness based on an assessment of this information. Many of the bureaus, however, also assign a “score” to a business, based that business’s ability to pay on time and other criteria. Like individual credit scores assigned by the three major consumer credit bureaus — Equifax, Esperian, and TransUnion — a business credit score fluctuates constantly, based on a company’s ongoing financial activities. Different business credit bureaus assign different kinds of scores, and lenders might pay more attention to some than to others, so it’s important to know something about these scores.
One of the most commonly cited business credit scores is the Paydex score, assigned to businesses by Dun & Bradstreet. Just as with an individual credit score assigned by a consumer bureau, a company’s Paydex score goes a long way toward determining whether that company can get a loan from a bank, and on what terms. However, individual credit scores are calculated based on a range of variables. In assigning a Paydex score, Dun & Bradstreet takes only one factor into account: whether that business makes its payments on time, and otherwise meets its creditors’ payment terms. Paydex scores are on a scale of 1 to 100; if your business pays all its bills on time, your score will be 80. If your score is higher than 80, then you’re paying the bills before they arrive, or during an early discount period established by your vendor. If you pay many bills fifteen days late, your company’s Paydex score will drop to 70; thirty days late, and the score will be around 50.
Because Paydex scores are widely referred to by lenders, it’s important to have an established score if you plan to apply for a loan. Get started four to six months before you apply for the loan. Dun & Bradstreet has various programs that help small businesses establish Paydex scores, but D&B charges hundreds of dollars to participate in these programs. Instead, apply for a DUNS number (a nine-digit business identification number) from D&B, free of charge, and use the number to establish a small line of credit with a company that reports to Dun & Bradstreet. Office supply companies might be one place to start. Make a few small orders and pay them off immediately, and then use your DUNS number to apply for a business line of credit with the same firm. Be sure that this firm routinely reports all such activity to Dun & Bradstreet; otherwise, your timely payments may not go toward establishing your Paydex score.
And once you have a good Paydex score, keep it active. Continue to use your credit, paying promptly of course. An inactive credit account may cause a Paydex score to slide.
Lenders typically like to see Paydex scores of 70 and above. They will not necessarily reject loan applications made by companies with Paydex scores of 60, for instance, but the lender will likely investigate the reason for the low score. This may hold up your loan, or may result in less favorable loan terms.
In addition to a Paydex score, Dun & Bradstreet assigns companies a “D&B Rating”: a short series of coded numbers and letters that reflect a company’s size (based on worth or equity) together with D&B’s overall assessment of that company’s creditworthiness, termed the “composite credit appraisal.” This assessment is gleaned from various information — payment history, financial information, public records, age of business, and the like. There is little you can do to influence your D&B rating — the size of your company is what it is. However, you should note your composite credit appraisal, which will be a number, 1 through 4, 1 being “high,” 2 being “good,” 3 being “fair,” and 4 being “limited.” If your number is unfavorable, you may want to check with Dun & Bradstreet to determine how they calculated it.
Apart from Dun & Bradstreet, Experian also assigns companies a score, called an “Intelliscore,” reflecting a company’s ability to pay creditors promptly. “Intelliscore Plus” is an upgraded version of this system, using statistical techniques and data to measure the risk that a company will default on a loan. A “Blended Intelliscore Plus” combines a company’s business data with the personal financial data of the business owner to produce an overall picture of credit risk. Intelliscore is based on a scale of 1 to 100, with 100 being the lowest risk and 0 being the highest risk.
Equifax, too, assigns scores to business performance; for instance, a company’s credit risk score predicts the likelihood that that company will be 90 days delinquent on a payment. Equifax’s business failure score predicts the likelihood of a company’s bankruptcy over the coming twelve months. And a “payment index” provides a dollar-weighted index of a company’s current and past payment performance. These numbers are all meaningful, and are available to lending institutions and others who are assessing your company’s creditworthiness. So it’s important to get this information from the bureaus and report any errors, omissions, or suspiciously low scores. But lenders pay most attention to D&B’s Paydex score; if you establish good credit by maintaining a high Paydex score, most likely the various scores assigned by other credit bureaus will then follow suit.
