Small Business Credit
As a small business owner, you may have contemplated various methods to obtain funding for business growth. While you may have initiated your venture with personal savings, the need for additional capital may arise in the future. Having a comprehensive understanding of business credit can be immensely beneficial.
Knowing the workings of small business funding, the calculation of business credit scores, the distinctions between business and personal credit scores, and the significance of establishing a favorable credit history can all aid in expanding your business and achieving success. In this article, we will explore four companies that provide business credit scores.
Dun and Bradstreet
Dun and Bradstreet (D&B) is a publicly traded corporation that maintains a commercial database containing more than 265 million business records. Unlike other credit bureaus like Experian, you have the option to self-report your business's financial statements and trade references to D&B, which can affect your D&B scores. To establish credit with D&B, you can apply for a D-U-N-S® Number, a unique nine-digit identifier assigned to each physical location of your business.
D&B provides various scores and ratings that assess your business's credibility. Familiarizing yourself with the following can be helpful:
1. Delinquency Predictor Score
The Delinquency Predictor Score (DPS) evaluates the likelihood of your business seeking legal protection from creditors, failing to settle outstanding debts and closing down or displaying other indicators of severe delinquency within a 12-month period.
Your DPS can range from 101 to 670 and is accompanied by a Delinquency Predictor Risk Class (ranging from 1 to 5) and Delinquency Predictor Percentile (ranging from 1 to 100) assigned by D&B. A higher DPS or percentile implies a lower chance of severe delinquency, while a lower risk class (preferably 1) indicates minimal likelihood of debt repayment failure in the coming year.
2. Financial Stress Score
The Financial Stress Score (FSS) uses industry data, your business's track record, and payment behavior to forecast the possibility of your business experiencing financial strain in the next 12 months.
Your FSS rating can range from 1,001 to 1,875, and D&B also assigns a Financial Stress Class (1 to 5) and Financial Stress Percentile (1 to 100) to your business. Similar to DPS, a higher score or percentile signifies lower financial stress risk, while a lower stress class (preferably 1) indicates minimal chances of financial difficulties.
3. Supplier Evaluation Risk Rating
If your company supplies goods or services to other businesses, your Supplier Evaluation Risk (SER) Rating could carry significant importance. This rating, which ranges from 1 to 9, forecasts the probability of your business shutting down in the upcoming 12 months, with a lower score indicating a reduced likelihood of closure.
4. PAYDEX® score
The primary metric to track for your business is the PAYDEX® score, which is both crucial and easy to understand. This score ranges from 1 to 100 and measures the likelihood of your business defaulting on its bills. A higher score is desirable since it implies a lower risk of late payments.
Your PAYDEX® score is determined by your payment history with D&B reporting accounts. It's worth noting that the scoring model gives more weight to larger accounts, so they have a more significant impact on your score.
Paying bills on time can earn you a score of up to 80. If you want to achieve a score closer to 100, you'll need to pay your bills an average of 30 days before the terms require. Think of it as a positive reinforcement for your timely payment practices.
Equifax's assessment of your business creditworthiness is based on data sourced from public records and the Small Business Financial Exchange™ (SBFE). SBFE keeps records of your business's payment history with credit card issuers, banks, vendors, and other creditors.
1. Payment Index
Equifax's business credit reports may feature a Payment Index, which gauges the probability of your business making timely payments. The Payment Index is measured on a scale of 1 to 100, with a higher number indicating a greater probability of making payments on time.
2. Delinquency and failure scores
Apart from the Payment Index, Equifax offers several versions of delinquency and failure scores, such as the Business Delinquency Score™ and Business Failure Score™. These scores forecast the likelihood of your business failing to pay its bills or going bankrupt within the next year. While the score ranges differ, generally speaking, a higher score is more favorable since it implies a lower chance of your business defaulting or failing.
In addition, Equifax's business credit reports may feature a business risk class, ranging from 1 to 5, which provides a less detailed view of a business's risk. A lower score indicates lower risk and is therefore more beneficial for your business.
Experian's Intelliscore PlusSM is a business credit score that uses more than 800 data elements to assess the risk of a business. The score ranges from 1 to 100, with a higher score indicating a lower risk of bankruptcy or delinquency in payments.
The data used to calculate the score come from various commercial and consumer sources, including public records such as bankruptcy filings and information about the business's establishment and operations. Payment data, such as on-time payments with a business credit card, is also considered.
Additionally, Intelliscore PlusSM may use blended data, which combines credit data from up to four business owners with company credit data. This means that personal credit scores of the business owners can impact the business credit score.
Overall, Experian's Intelliscore PlusSM provides businesses with a comprehensive assessment of their credit risk by analyzing a wide range of data elements from multiple sources.
The FICO® Small Business Scoring ServiceSM (SBSSSM) uses data from business credit bureaus and your application to determine your business credit score. It may also incorporate data from the principal's consumer credit reports, which means your personal credit can impact your FICO business credit score.
This scoring system is especially important for businesses seeking certain 7(a) loans from the Small Business Administration (SBA), as it is the credit scoring tool used by the SBA to expedite credit decisions. FICO's small business credit scores range from 0 to 300, with a higher score indicating that your business is more likely to make timely payments.
Overall, the FICO® SBSSSM is a useful tool for small businesses seeking credit, as it takes into account a variety of data points from both business and personal credit reports to provide an accurate assessment of credit risk.