Understanding Business Credit Scores
February 20, 2019 | Last Updated on: July 18, 2022
February 20, 2019 | Last Updated on: July 18, 2022
Much like the credit scores that you and I check before we apply for a new car loan or mortgage, business credit scores help companies and their creditors determine how likely it is that the business will repay their debts. The score comes from a business credit report and is a numeric value and represents a businessâ€™ history of meeting its debt obligations in a timely fashion. The higher the score, the more likely it is that a business will gain credit approval to do things like getting a loan for a new vehicle or construction, open a business credit card, or gain access to a business line of credit. This concept is also known as creditworthiness.
Now that we know business credit scores exist and that theyâ€™re different from personal scores, letâ€™s take a look at how different they are, why theyâ€™re important, and how they are calculated.
While personal credit scores range from 300 to 850, business credit scores usually range from 0-100. Like personal scores, a business credit score isnâ€™t the only factor used when making a credit determination, but they play a large role in a creditorâ€™s decision to move forward or decline a credit application.
Consumer credit scores are based on an algorithm created by FICO. Even though scores may vary from each of the reporting bureaus, they are calculated using the same basic algorithms. This creates a somewhat standard process to determine personal credit. Business credit scores, on the other hand, donâ€™t follow an industry-standard at the moment, which may lead the numbers to be significantly different from report to report.
Personal credit reports are required to be made available for free once a year from the three major bureaus: Equifax, Experian, and TransUnion. Businesses do not benefit from similar regulations in their favor and must often pay, sometimes at high prices, to gain access to this information. The three major business credit bureaus, Dun & Bradstreet, Equifax, and Experian all price their business products differently.
Thankfully there are new services available to small business owners that will help them get an understanding of their business credit score for the same low price of free. The BizAnalyzer Virtual CFO is one of these, where you can see your overall business score and also dive deep into the key attributes that are contributing to it.
The last major difference between business and personal scores is privacy. Consumers and their approved creditors can view scores, but no one else can randomly view the credit information of another individual. With businesses, all company credit information is publicly available, and anyone can view a credit report for a business as long as it has been paid for.
This is one area where personal and business credit scores are very similar. Monitoring a business credit score is vital to the companyâ€™s financial success for a lot of reasons:
Since there is no universal standard for calculating business credit scores, we will look at the most common methods used by the three major business reporting bureaus.
Equifax uses a three-pronged approach to scoring businesses:
Experian uses a system it calls the CreditScore report, which is a comprehensive measure of a business’s financial health. The score includes payment trends, public records, and account histories. The Experian score is different than the other two because it considers much more than just payment histories. Legal filings, company background information, and collections agency filings, among other things, all get factored in.
Just like with personal credit scores, Experian business credit scores consider outstanding loan balances, and whether or not the business has any liens, judgments, or bankruptcies on its record.
Dun & Bradstreet uses a metric called a Paydex score, which ranges from 0-100. The number is calculated by using payment data that is either reported to data collection companies or directly to Dun & Bradstreet itself. The company also uses:
Businesses must opt-in to the Dun & Bradstreet scoring system by filing for a DUNS number through the companyâ€™s website.
If it sounds like these three reporting bureaus are using very similar tactics to calculate business credit scores, itâ€™s because they are. Just like the three big consumer bureaus, TransUnion, Equifax, and Experian, the three major business credit bureaus gauge scores slightly differently but indicate much of the same information. This makes it important to not only understand how business scores are calculated but why theyâ€™re different.
Business credit scores may sound more complicated than personal credit reports, but the concept of monitoring the score and staying current on payments and accounts is the same across the board. Knowing the factors that play into a business score and how those scores affect everything from small business loan applications to insurance rates can help a business get the best pricing available and may even help set the company up for long-term financial success.
As a business owner, you should start monitoring your businessâ€™s financial performance as itâ€™s seen by the outside world. Although there are lots of business credit rating services and products out there that cost a lot, you can get started by using the BizAnalyzer Virtual CFO in just a few minutes. Check it out and use those credit scores to grow your business!
Feel that you may have a below-average credit score and are still looking to obtain a business loan? Check out our in-depth guide on Obtaining Bad Credit Business Loans.