How are Business Credit Scores Calculated?

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How are Business Credit Scores Calculated?

Published By Janet Gershen-Siegel at October 14, 2017

How the Small Business Finance Exchange Affects Your Business: What You Don’t Know Credit Suite-How are Business Credit Scores Calculated-How to Check a Business Credit Rating>

How Are Business Credit Scores Calculated? You’d Be Surprised How Few Business Owners Know

You might have been speculating– how are business credit scores calculated? Or you need to know what has a bearing on company credit score. Well not to worry. Because here are all the specifics for anybody questioning just precisely how are business credit scores calculated. Know this before your competition does!

Credit Reporting Agencies

There are three significant credit reporting bureaus and they all calculate your score a little differently. While a lot of the techniques are the same, the focus put on each variable differs.

This is why you sometimes see differences in credit scores depending upon who’s doing the reporting. So long as there are no inaccuracies on the report, the scores should be similar. But they are not always going to be identical.

How are Business Credit Scores Calculated? Equifax

A few of the more vital pieces of information Equifax examines are credit usage and public records. It also looks at how your business handles its financial and nonfinancial accounts. Get rid of financial obligations as quickly as possible and don’t go delinquent.

Always keep your small business’s credit utilization reasonable. So use less than 30% of your total available credit for optimal results. And avoid overdue payments. If you can do all of these, you should have a good Equifax score.

Your Company’s Equifax Score

Equifax displays three distinct business determinations on its business credit reports. These are the Equifax payment index, your small business’s credit risk score, and its business failure score.

Equifax Payment Index

It’s similar to the PAYDEX score. Equifax’s payment index has a measurement on a scale of 100. It demonstrates how many of your company’s payments were on time. These include both data from creditors and vendors. Nevertheless, it’s not meant to forecast future actions, which is what the other two scores are for.

Equifax Credit Risk Score

Equifax’s credit risk score assesses how likely it is your business will become severely delinquent on payments. Scores range from 101 to 992, and they assess:

  • Available credit limit on revolving credit accounts, e. g. credit cards
  • Your business size
  • Evidence of any non-financial transactions which are overdue or on charge off for two or more billing cycles
  • Length of time since the opening of the oldest financial account

Equifax Business Failure Score

Lastly, Equifax’s business failure score takes a look at the likelihood of your business shutting down. It runs from 1,000 to 1,600, assessing these factors:

  • Total balance to total current credit limit average utilization in the prior three months
  • How much time since the opening of the oldest financial account
  • Your business’s worst payment status on all trades in the last 24 months.
  • Evidence of any non-financial transactions which are overdue or have been charged off for two or more billing cycles.

Equifax Scoring Analysis

For the credit risk and the business failure scores, a score of 0 means bankruptcy.

A great Equifax score for your company is as follows:

  • Payment Index 0-10
  • Credit Risk score 892-992
  • Business Failure score 1400-1600

Keep your scores up and good things will happen.

How are Business Credit Scores Calculated? Dun & Bradstreet (PAYDEX)

D & B makes a variety of proprietary computations to try to determine whether your company can pay its bills. One of these is the Financial Stress Scores, which is an attempt to predict how likely it is your small business will fail in the next year.

Business failure is specified as: you get legal relief from your creditors. So normally, that’s bankruptcy. Or you quit all of your business operations without totally paying all your creditors. Another option is you voluntarily withdraw from your business operations and then you leave past due financial commitments. Or maybe you enter into business reorganization or receivership.

And another possibility is you make a plan for the benefit of your creditors.

Details

Dun & Bradstreet’s scores range from 1,001 to 1,875. A score of 1,001 exemplifies the highest chances. And a figure of 1,875 shows the lowest possibility of business failure.

The PAYDEX Score, on the other hand, serves as Dun & Bradstreet’s dollar-weighted evaluation of how your company has paid its invoices during the past year. D & B bases this score on trade experiences as reported by various sources. The D & B PAYDEX Score runs from 1 to 100. As you might assume, higher scores mean a better payment performance.

Your Small Business’s PAYDEX Score

Dun & Bradstreet’s PAYDEX score runs from 0 to 100. A PAYDEX score has a basis in payment details which is on report to the bureau. Or it is on report to data-gathering companies partnering with the CRA. D & B uses this data, along with a credit score and financial stress score. The idea is to advise the amount of credit a credit issuer should extend to your small business.

Getting a PAYDEX Score

To generate a PAYDEX score, you must file for a DUNS number by means of Dun & Bradstreet’s website. The number is free of charge. In addition the CRA needs to have reports of your payments with four or more vendors. Your small business’s PAYDEX score reveals if your payments are generally prompt. It will also show if you are ahead of schedule. So as you may expect, a higher number is better.

PAYDEX Score Details

The scores work out as follows:

  • 80-100: A low risk of late payments
  • 50-79: A medium risk of late payments
  • 49: A high risk of late payments

Business Credit Score

Your company’s credit score runs from 1 to 5. 1 is the very best score. This matches your small business with other companies with similar payment histories. The number shows how frequently those companies tend to pay promptly.

This information can help lenders to recognize your company’s standing. But it does not truly reflect all of the payment data from your small business.

Financial Stress Score

The financial stress score also runs from 1 to 5. This score matches your business with other small businesses sharing similar financial and business properties. These similarities are in areas like size or amount of time in business.

This score demonstrates how frequently those comparable businesses tend to pay on time. As before, 1 is the best score. This rating is a broader evaluation of the business landscape, rather than analysis of your business’s actual payment history.

A good PAYDEX score for your small business is 80-100.

How are Business Credit Scores Calculated? Experian

Just like Equifax and Dun & Bradstreet, Experian investigates not only how much credit you are using, but also how quickly your small business is satisfying its financial obligations. Experian also reviews bankruptcies, and judgments or liens against your business. And they look at any UCC filings. Experian also examines any tax liens against your business.

They also base a portion of their scoring on how long your business has been in business. And they consider for how long your company has had an Experian listing. The longer, the better.

Your Small Business’s Experian Commercial Credit Score

Experian’s Credit Score report includes things like a business credit score. And it also has additional information, such as account histories, payment trends, and public records. Experian commercial credit scores range from 1 to 100.

Unlike Dun & Bradstreet’s PAYDEX score and Equifax’s payment index, Experian takes into consideration several factors. So it does not just look at payment histories.

Experian Scoring Factors

The factors that go into the calculation include:

  • Lines of credit your small business has an application for in the previous nine months
  • New lines of credit you’ve begun in the last six months
  • Your small business’s years in business
  • Payment history in the past twelve months

More Experian Scoring Factors

  • Lines of credit in use in the prior six months
  • Collections totals within the previous seven years
  • Percentage of available credit in use
  • Number of payments one – 30 days overdue, or 31 days or more late
  • Amount of non-net-30 lines of credit (that means the payment is due in less or more than 30 days).

Commonly, even small businesses which use credit conscientiously will get a medium-low risk rating. But as you might expect, older businesses will have a much easier time attaining a low-risk rating. So time in business will really matter here.

A decent Experian score for your small business is 76-100.

Now You Can Answer the Question: How are Business Credit Scores Calculated?

Knowledge is power. And if you know more than the competition, you can beat them.

For all of the major credit reporting agencies,  the particulars may end up weighing slightly differently. But the bottom line is just one thing. They are all evaluating how reliably your business uses credit.

Do you pay back your invoices promptly or in advance, and fully? Then your score will be much better.

Do you use so much credit that your company has problems paying it off promptly and accounts go to collections? Then your score will be worse. Judgments and liens will negatively affect your score. But more responsible time in business will favorably affect it.

So be responsible with credit, and your company’s credit score is going to be a good one.

Discover this new way to answer the question: how are business credit scores calculated.

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