Did you know that, as a business owner, you don’t just have one credit score, but two?!
You have your personal credit score. But your business also has a business credit score. According to “Business Credit Decoded”, 90% of small businesses are unaware that their business has a unique business credit score independent from the owner’s personal credit score.
The Big Three consumer credit reporting agencies are: Equifax, Experian, and Transunion. You’ve probably heard of some or all of them. You’ve heard of the FICO score and you’ve seen the reporting agency names referenced on popular credit score sites like CreditKarma. People are generally pretty familiar with the personal credit score. It comes up in conversation. When you apply for a mortgage, it’s one of the first items mentioned by the mortgage lender in terms of trying to ascertain which loans you qualify for and at what rates. There are countless articles and books on how to improve your credit score.
But in contrast, business owners may go years before they become acquainted with the DUNS number, Paydex score, Intelliscore, or Dun and Bradstreet. According to Entrepreneur.com, less than 10% of small business owners were familiar with the concept of a business credit score (as distinct from consumer credit score). However, this phenomenon is good news for those business owners who take the time to get up to speed on business credit and thoroughly understand how to put it to use on their company’s behalf. The 90% of business owners know nothing about business credit means more money available for the small percentage who do.
Companies ranging from Dell to Home Depot provide special programs and payment terms to companies depending on their business credit score (even though these programs of theirs are not “well-advertised”). Companies from business lenders to leasing companies evaluate your worthiness based on your business credit score as well. In other words, companies you’ve done business with have likely judged your eligibility for all kinds of programs and payment schedules without your knowing about it.
But how is a business credit score measured and how is it calculated?
Basics on the Business Credit Score
The consumer credit score goes from 300 to 850; a 300 credit score is lousy and most lenders will avoid the borrower like the plague. Experian considers a consumer credit score of above 740 to be super-prime; these borrowers are eligible for the most loan programs at the best rates. The definition for sub-prime borrowers varies and there is no fixed definition. However, many define sub-prime as a consumer credit score of under 640. “Sub-prime” was much mentioned in association with the 2008 global financial crisis due to the housing bust brought about, in large part, by sub-prime borrowers who defaulted on their loans. Such sub-prime borrowers are generally now excluded from consideration for mortgage loans, and are often rejected for other kinds of loan products such as credit cards and auto loans.
The business credit score has a different scale than the consumer one. It goes from 0 to 100 (instead of 300 to 850). Of the three main business credit reporting agencies, two are familiar, as they are major players in consumer credit reporting: Experian and Equifax. But instead of TransUnion rounding out the top three, the third major business credit reporting agency is Dun & Bradstreet – the most influential business credit scoring company.
How is my Business Credit Score determined?
The business credit score (from 0-100) is a percentile score. It is relative to other businesses and reflects the percentage of businesses that you score higher or lower than. That is, if your business score is 70, that means that you have a stronger credit than 69% of the businesses out there, but there are 30% of businesses that have stronger credit than you do.
The main business credit scores are:
- Paydex : business credit score by Dun & Bradstreet
- Intelliscore: business credit score by Experian
- Business Credit Risk Score: business credit score by Equifax (note: Equifax offers range of business credit scores that each use different number ranges)
The business credit score is largely determined by a business’ history of paying back its suppliers and vendors. A score of 80 or higher is considered “good” or healthy credit. A strong business credit score can be secured by ensuring payments are made promptly to suppliers and vendors. It’s important for a business owner to have those accounts report favorable payment history to the business credit reporting agencies. If bills are paid on time, the business credit score will be positive. But if payments are made late, the business credit score will drop. The score will adjust according to how early or late the bills are paid. If bills are paid on time consistently, then that business will likely have a score that is 80 or greater.
How on-time bills are paid is the main driver of the business credit score like Paydex or Intelliscore. It’s a solid indicator to lenders of how likely that business is to make good on its financial commitments at an agreed-upon date in the future. Lenders evaluate this score carefully when deciding whether or not to give a business a loan. Another important aspect of the Paydex score is that it is a “weighted average” score. This score gives more weight to the trade accounts that report greater amounts of credit extended and less weight to accounts that report lower dollar amounts of credit.
Have a look at the following graphic to better understand how individual payment events with vendors/suppliers get scored. The cumulative scoring averages of these payment events contributes to the overall business credit score.
As you can see, on-time payment yields a score of 80. The earliest payment yields a score of 100. The more delayed the payment on bills, the lower the score received. Likely, not every one of your vendors and suppliers reports transactions to the business credit reporting agencies, but some of these transactions are captured, and overall, they are carefully monitored to calibrate the overall business credit score of your business.
Just as the consumer credit score has different components, such as history of repayment, credit utilization, length of time credit accounts have been active, etc., the business score has its own components that make it up.
For the business credit score, current payment status, trade balances, and percent of accounts delinquent account for 50-60% of the score makeup. The historical behavior/payment history contributes 5-10% of the total score. The business’ credit utilization is responsible for 10-15% of the total score. This has to do with the amount of credit that has been used by the business in relation to the balances they have on those accounts. The company profile, industry risk, age of business, and size of business assessed by number of employees accounts for 5-10% of the total score. Approximately 10-15% of the score is influenced by the derogatory items, collections, liens, judgments, and bankruptcies that business has.
In the following image, the components of the business credit score are summarized:
Experian’s Intelliscore (an alternative to Dun & Bradstreet’s Paydex score) reveals other factors taken into consideration for their business score. When Experian is assigning a business a credit score they take different factors into account. They refer to these factors as predictive data; they leverage predictive data to gauge a business’s risk as a borrower. The score is made of different components such as:
- how recent are the delinquencies
- how many accounts are current versus delinquent
- average balances on accounts
- the percent of balances seriously delinquent
- the credit utilization ratio
- balances on leases.
Experian describes firmographics as the background information of a business such as the industry/sector it operates in and the size of the business (measured by how many employees it has). Firmographics also take into account the length of time the business has been reporting to Experian. They have found that a business with a longer Experian credit file, in terms of years in existence, is less likely to default.
Experian also provides reports that reflect information about the business and the business owner’s personal credit history called “blended” reports. The”blended” score of the business – which combines the business credit score with that business owner’s personal credit score – with the idea being that the two are both related to the likelihood of that particular business paying what they owe.
Studies show that consumer reports don’t offer the most comprehensive assessment of risk on their own. With blended reports Experian takes into account both factors from the business and from the consumer credit of the owner or personal guarantor. The blended score factors in things like number of personal credit cards with 90%+ utilization.
Having a basic awareness of the business credit score puts you ahead of a surprising number of businesses who don’t realize that their payment histories are being carefully tracked and that this business score impacts what loans their business is eligible for. This primer gives you the fundamentals of what the business credit score is, what contributes to it, and how it’s calculated. While there is more to it, and certainly a fair number of techniques that can improve your score, it’s clear that maintaining a reliable payment schedule to vendors and suppliers is important to sustaining a strong business credit score.