What is on your business credit reports?
A business who can demonstrate healthy credit profiles is more likely to qualify for new credit at affordable rates. Similar to consumer credit scoring, business credit scores are used to grade a firm’s payment habits and financial responsibility.
There are multiple business credit bureaus, but the largest and most significant agencies are Dun & Bradstreet, Experian, and Equifax. They all operate separately and report credit data differently, but they use similar information to tabulate scores and build profiles for each business.
How to understand all three credit reports:
- Dun & Bradstreet business credit reports: There are 7 different scores through D&B alone – they are by far the largest business credit reporting agency.
- PAYDEX score: Score ranges from 1 to 100 with the higher number reflecting the lowest risk of paying beyond terms. Most businesses have a Paydex Score between 30 and an 80. A high Paydex Score indicates excellent payment history and other factors.
- Delinquency Predictor: Class ranges from 1 – 5, with 1 representing the lowest predicted risk of paying late. Score ranges from 101 – 670, with a higher score reflecting a lower risk of paying late. The Delinquency Predictor model is based upon the observed characteristics of hundreds of thousands of businesses in Dun & Bradstreet’s database and the relationship these characteristics have to the probability of a company experiencing severe delinquency over a period of 12 months. This score is designed to predict the likelihood that a company will pay its bills in a severely delinquent manner (90 days or more past terms), obtain legal relief from creditors or cease operations without paying all creditors in full over the next 12 months, based on the information in Dun & Bradstreet’s database.
- Financial Stress: Made up of a class and a score – the class ranges from 1 – 5, with 1 representing a low risk of business failure and the score ranges from 1001 – 1875, with a higher score representing a lower risk. The Financial Stress Score was designed to help decision-makers predict the likelihood that a business will require legal relief from creditors or cease operations without paying all creditors in full over the next 12 months. The Financial Stress Score uses the full range of Dun & Bradstreet’s information, including financials, comparative financial rations, payment trends, public filings, demographic data and more.
- Supplier Evaluation Risk Rating: (SER rating) This score ranges from 1 to 9, with 9 representing the lowest risk.The SER Rating is used by decision-makers in the Supply Chain industry to measure the level of risk associated with a particular supplier or business. The Supplier Evaluation Risk Rating is used to determine if a supplier is more or less likely to cease business operations or become inactive over a 12 month period. The Supplier Evaluation Risk Rating considers statistics, probability and predictive data to assess a supplier’s likelihood of failure and provides vendors with the resources to compare suppliers on a global scale. Because the Supplier Evaluation Risk Rating takes more into consideration, a business might have a Supplier Evaluation Risk Rating that changes more frequently than its Dun and BradstreetFinancial Stress Score.
- Credit Limit Recommendation: Listed as a dollar amount on reports, it’s intention is to help creditors/lenders make credit decisions. The amount is based on “historical analysis of credit demand of customers in D&B’s U.S. payments database which have a similar profile to yours.” (D&B)
- D&B Rating: Generated with company information such as size, industry and financials (if available).
- D&B Viability Rating: A performance score that predicts the likelihood a business with go out of business, cease operations, or file for bankruptcy over the next 12 months.
2. Experian business credit reports: Experian’s CreditScore℠ business report provides information on balances, days paid beyond terms, and financial information about trade payments, each report includes:
- Credit Ranking Score: The Credit Ranking Score ranges from 1 to 100, with the lowest score reflecting the highest risk. The score is based on a number of factors contained in a business credit report such as outstanding balances, payment habits, credit utilization, etc. The objective of the Credit Ranking Score is to predict payment behavior. High Risk means that there is a significant probability of delinquent payment. Low Risk means that there is a good probability of on-time payment.
- Predicted Days Beyond Terms (DBT): Experian uses industry trends, public records, collection accounts, number of inquiries and other factors to forecast DBT for 60 days into the future, they use color-coding:
- Monthly and quarterly graphs: CreditScore℠ business reports provide monthly and quarterly graphs to illustrate payment history (percentage of times paid 30, 60, 90, or >90 DBT).
3. Equifax business credit reports: Equifax only reports information gathered from their ‘qualified’ vendors, businesses cannot call or request for Equifax to update their company information. Each report includes:
- Credit Risk Score: Ranges from 101 to 992, the higher the better, a score of 0 means there is a bankruptcy on file. The Business Credit Risk Score is based on a combination of reported financial transactions, including banking, leases, trade accounts, public records, and business demographics. Equifax provides explanations of why a particular business earned a score based on a series of reason codes provided in the report.
- Business Failure Score: Ranges from 1,000 to 1,880, with the higher score representing the lower predicted risk of filing for formal or informal bankruptcy over the next 12 months
- Payment Index Value: Ranges from 0 to 100, 90+ means the business “Paid as Agreed”, this score is calculated using the total number of financial and trade credit payment experiences in the Equifax Commercial Database.
What is hurting you on your business credit report and how is it viewed by others
All the company credit reporting agencies report delinquencies and negative data. Some of the information that may weigh poorly on a company’s scores are:
- Law suits
- Bankruptcy filings
- UCC filings
- Payment trends
- Excessive inquiries can impact your business credit scores – this is especially true with Experian Business.
Even inaccurate or out-of-date company information can hurt the standing of your business credit reports and scores. Business credit is unregulated, it’s very common for false data to land on company reports from another firm with a similar name or in the same industry. It’s also common for certain industries to experience more of an impact to their credit than others.
What business owners should know about business credit
The information gathered, analyzed, and quantified in your business credit reports is used by creditors, leaders, vendors, and anyone you currently or may do business with. It can even be used by your competitors who may hand a copy of their business reports when competing for a bid. If they know your business credit is less than stellar at the same time it is to their advantage to bring light to their excellent credit scores. Scores and indexes are used to predict the financial stability and reliability of a company. Creditors will want to see healthy scores and a record of good payment habits before offering a line of credit, loan, or payment terms. Anyone can check business credit scores and reports, even competitors, to learn insight on a business’s financial standing.
Here are some ways that business credit is used:
- Equipment leasing
- Business loans
- SBA loans
- Credit extensions
- Payment terms
- Commercial insurance
- Investor relations
- Government bids
- A winning edge over the competition. Companies are often judged by their credit score, and a healthy one reflects a financially sound and successful business. This can make the difference when competing for a bid/contract or acquiring a new business-to-business customer.
Business reports often contain a lot of details, but there are many factors to consider when business credit building. Keep in mind, there are a handful of other business credit bureaus that may impact your company depending on your industry and which lender you’re using.
- Unique algorithms and metrics: Business credit is reported separately and differently than personal credit.
- Not all vendors report: It’s possible to have multiple vendors and still have no established business credit.
- Business credit profiles can be checked without prior consent: Anyone can purchase business reports to gain knowledge about a company’s payment habits. Businesses can miss out on profitable opportunities and have no knowledge of it.
- Both your business and the owner’s personal credit matter: Most lenders and creditors will want to see both the principal’s personal credit and the company credit reports/scores. If you’re seeking an SBA loan or some traditional bank loans, your FICO SBSS Score will be used for screening the application.
Accuracy is very important to a credit profiles; the slightest company record error can be detrimental to their score. When lenders view your company profile(s) they should see valid information that shows a stable and viable company who can handle taking on additional orders or expenses without becoming financially stressed.