Published By Janet Gershen-Siegel at February 26, 2018
Your D & B Report (also known as your (Dun & Bradstreet Report) is one of the first things a business will look at when deciding whether to do so business with you at all. Dun & Bradstreet is a business services giant, and they offer database-generated reports to their clients to help them decide whether you, a potential vendor, supplier, or business partner, are a good credit risk. A company will rely on the D & B Report about your firm in order to make informed business credit decisions and avoid bad debt. Dun & Bradstreet takes several factors into account in creating such a report. Let’s look at all of these factors in turn.
To figure out how likely your company is to be late in paying your debts, Dun & Bradstreet uses predictive models. They use predictive scoring, which takes historical information to try to predict future outcomes. D & B identifies the risks inherent in a future decision, by comparing historical information to a future event. The idea is to take objective and statistically derived data, rather than subjective and intuitive judgments. They use a scoring system to rank and order accounts based on the probability of late payments. However, Predictive Scoring only represents a statistical probability, and not a guarantee.
The Financial Stress Percentile compares your company to other businesses in the same region, industry, number of employees, or number of years in the business. Financial Stress Score Norms calculate an average score and percentile for similar firms. These Norms benchmark where your business stands in relation to your peers.
Dun & Bradstreet generates Financial Stress Scores to predict how likely it is your business will fail over the next twelve months. Business failure means you get legal relief from your creditors; you stop your business operations without paying all of your creditors in full; you voluntarily withdraw from your business operations and leave unpaid obligations; you enter into receivership or reorganization; or you make some sort of arrangement for the benefit of your creditors. D & B’s scores range from 1,001 to 1,875. A score of 1,001 represents the highest probability while a figure of 1,875 shows the lowest probability of business failure.
D & B scores your company with numbers ranging from 1 to 5. A 1 is businesses least likely to fail, while a 5 is firms most likely to fail. Therefore a D & B customer can quickly divvy their new and existing accounts by risk and then decide how to proceed. If your business is shown as being Discontinued at This Location; Higher Risk; or Open Bankruptcy, you will automatically get a 0 score.
This score has a 1–100 ranking where a 1 percentile is most likely to fail and a 100 percentile is least likely to fail. If D & B identifies your company as financially stressed that means you have ceased operations following assignment of bankruptcy; or voluntarily withdrawn from business operation with unpaid obligations; or closed up shop with a loss to creditors; or your company is in receivership or reorganization; or you have made some sort of an arrangement for the benefit of your creditors.
The Supplier Evaluation Risk Rating (also called a SER Rating) predicts how likely it is your company will get legal relief from your creditors or end operations without paying creditors in full over the next twelve months. Once Dun & Bradstreet calculates the Financial Stress Score percentile for your company, they apply a second set of rules to figure the SER Rating, on a scale of 1–9. A 1 means your company is least likely to fail to pay your own suppliers. A 9 is the opposite, showing the highest likelihood.
A D & B Credit Limit Recommendation includes two recommended dollar guidelines:
1. A conservative limit, suggesting a dollar benchmark if a company’s policy is to extend less credit to minimize risk and
2. An aggressive limit, suggesting a benchmark if a firm’s policy is to extend more credit with potentially more risk.
D & B bases these dollar guideline amounts on a historical analysis of the credit demand for companies similar to your business, with respect to employee size and industry. The guidelines do not address whether your business can pay that amount or if you hit your total credit limit. D & B assesses how likely you are to continue to pay your obligations within the agreed-upon terms and how likely you are to undergo financial stress in the next twelve months.
A D & B Rating helps companies quickly assess your business’s size and composite credit appraisal. Dun & Bradstreet bases this rating on information in your company’s interim or fiscal balance sheet, plus an overall evaluation of the firm’s creditworthiness. The scale goes from 5A to HH; these Rating Classifications show your company size based on worth or equity as computed by Dun & Bradstreet, which assigns such a rating only if your company has supplied a current financial statement.
This number, between 1 through 4, makes up the second half of your firm’s rating. It reflects Dun & Bradstreet’s overall rating of your business’s creditworthiness. They analyze company payments, financial information, public records, business age, and other factors.
If your company does not provide current financial information, you cannot get a Composite Credit Appraisal rating of better than a 2. The 1R and 2RRating categories show company size only based on the total number of employees, and are assigned if your company’s file does not contain a current financial statement. Employee Range (ER) Ratings apply to certain lines of business not lending themselves to classification under the D & B Rating system. These kinds of businesses receive an Employee Range symbol based upon the number of employees and nothing else.
In general, when Dun & Bradstreet does not have all of the information they need, they will indicate that in their reports. However, missing information does not necessarily mean your firm is a poor credit risk.
A PAYDEX Score is Dun & Bradstreet’s dollar-weighted numerical rating of how your company has paid the bills over the past year. D & B bases this score on trade experiences reported by various vendors. The D & B PAYDEX Score ranges from 1 to 100; higher scores mean a better payment performance.
Finally, any report is only as good as the data it comes from. Dun & Bradstreet’s database contains over 250 million companies spanning the globe. It includes around 120 million active firms and about 130 million companies which are out of business but kept for historical purposes. D & B continuously gathers data and works to improve its analyses to assure the greatest degree of accuracy possible. To ensure as accurate a report as possible, it quite literally pays to provide D & B with your company’s current financial statements.