Without question, your business credit score is important. If you go to get a loan, purchase equipment, even rent office space, your credit score is most likely going to come into play. So we thought we'd take a moment to break down the components of business credit scores, help you to understand the different score ranges, and offer some suggestions for improving your score.
First off, you need to know that a credit score is an assessment of risk, in its most basic terms. Lenders will refer to this score as a way of measuring how much of a risk you'd be to loan money to and consequently how credit-worthy your company actually is. It evaluates things such as your credit history, usage, and financial sustainability.
By knowing your score, lending institutions can get a feel for how good you are when it comes to handling your debt. Based on what they see, they will opt to approve or reject your application for funding; they will also use this credit score to determine things such as rates and terms. So it goes without saying, the better your score, the more favorable the terms you will receive.
Good Business Credit Scores
There are four credit reporting agencies with which you should be familiar: Dun & Bradstreet, Equifax, Experian, and FICO SBSS (Small Business Scoring Service/). Each has its own rating systems which denote good and subsequent poor scores. We've broken these down below:
Dun & Bradstreet
Dun & Bradstreet keeps a record of all business scores through their Paydex system. The Paydex takes into account primarily a company's annual payments to its various creditors. The score range falls between 0 and 100 with 80 being considered a good score.
Dun & Bradstreet Delinquency Predictor Score
Also associated with Dun & Bradstreet is a Delinquency Predictor score which falls between 101 and 670. This basically predicts how likely you are to fall behind payment wise. Also, if your business is in danger of going bankrupt and/or closing its doors. A higher score is better, so, for instance, a score over 500 is good here.
Equifax Payment Index
With Equifax, the business score is known as the Payment Index. This essentially looks at your 12-month history of payments and the timeliness thereof. The scale goes from 0 to 100, with a 90 considered good.
Business Delinquency Score
As with Dun & Bradstreet, Equifax also has a delinquency predictor. This again is letting lenders know the likelihood of your company defaulting on its payments. Running from 101-992, it categorizes anything above 700 as good as far as credit risk goes.
Equifax Business Failure Score
Equifax also offers yet a third business score called the Business Failure Score. It tells people whether or not your business has a chance of failing in the next year. The scale here ranges from 1000-1880; safe is when your company hits at least a score of 1315.
The Experian Business Credit Score
Experian has one credit ranking for businesses called the Credit Ranking Intelliscore Plus. Intelliscore Plus. This score actually combines both business credit history as well as that of the owner of the company. Ranging from 0 to 100, a 76 or better falls into the good category with this one.
FICO Small Business Scoring Service
FICO takes its information from the other business reporting agencies. The SBA relies upon FICO quite heavily when determining loan eligibility. The scores run from 0 to 300, and the SBA usually likes to see at least a 160 before approving any application.
When Calculating Business Credit Scores
There are a number of criteria that go into your business credit score. And each agency is a little different in how they go about factoring these scores. While we don't have all of the information to let us know precisely how each agency calculates business credit scores, we do know that certain things without question go into the formula, to include variables such as:
- Articles of incorporation
- Any Credit applications
- All Business tax filings
- Personal tax filings
- Any Legal filings
- Industry statistics
- Creditor reports
- Relevant Business owner reports
- Any Known Public records
Your credit score is readily available. And not just to you…Anyone who wants to see your company's credit score can take a look at it for a fee. So this includes vendors, suppliers, potential lenders. That is why it's so important to stay on top of that score, and know where you fall so that you can make adjustments and work at bettering it if need be. Business owners, unlike with personal scores, have to pay to get a copy of the various credit reports.
How Can You Build Up Your Business Credit Score
Just like with personal credit scores, working on improving that business score takes some time. It's not an overnight fix. But rather your score improvement entails a series of steps and decisions you make for the company that will ultimately help move you into the "good" zone. Some of the things you definitely need to be doing:
- Monitor your business credit regularly. You want to be sure to spot and rectify any errors. Also, you want to be on the lookout for fraud.
- Make your payments on time. This is hugely important. Late payments will hurt your score.
- If you are going to be late, let your creditors know. This way if you can work something out with them, they may not report it as a late payment.
- Use 30% or less of your total credit. The ratio is important when calculating scores.
- Have a business credit card and use it responsibly. Utilizing a business card in a smart way can only help build up your credit score.
The worst thing you can do is just sit back and hope for a good score or hope that it improves itself over time. Be proactive, take action and understand your score and the variables used to calculate it.