How your business’s financial health determines your Dun & Bradstreet Rating

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How your business’s financial health determines your Dun & Bradstreet Rating

Published By Janet Gershen-Siegel at October 1, 2017

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A Dun & Bradstreet Report is a database-generated report. The business services giant produces such a report in order to help its clients in making decisions regarding new credit applications. The financial health of a business is a large portion of what determines its D & B rating.

Dun & Bradstreet takes several factors into account in generating such a report. These include a predictor of payment delinquency; how financially stressed your company is compared to comparable businesses; credit limit recommendation; D & B rating; and PAYDEX score. Let’s look at all these factors in turn.

Delinquency Predictor

Dun & Bradstreet uses predictive models to determine how likely your company is to be behind with its payments. They use historical data to try to predict future outcomes. This involves identifying the risks inherent in a future decision. D & B examines the relationship between historical information and the future event. This represents an objective and statistically derived counterpart to subjective and intuitive analyses. Such scoring enables any business to rank and order accounts based on the probability of an event taking place, such as delinquent payments.

If your company’s historical payment data shows delinquent payments, the delinquency predictor will forecast more delinquencies.

Financial Stress Percentile

The Financial Stress Percentile compares your company to other businesses in the same region, business sector, amount of employees, or number of years in the business. Financial Stress Score Norms show an average score and percentile for all firms with similar demographic attributes. These Norms can be used in order to measure where your business stands in relation to the norm for its peer group.

Financial Stress Score

Dun & Bradstreet generates Financial Stress Scores to predict the chance of business failure over the upcoming twelve months. D & B defines business failure as a firm which gets legal relief from its creditors; stops its business operations without paying all of its creditors in full; voluntarily withdraws from its business operations thereby leaving unpaid obligations; enters into receivership or reorganization; or makes some kind of arrangement for the benefit of its creditors, based on the information found within D & B’s commercial database. The score ranges from 1,001 to 1,875. A score of 1,001 stands for the highest probability. A figure of 1,875 exemplifies the lowest probability of business failure.

If your company has a lot of lawsuits and liens against it, those will negatively impact your financial stress score.

Financial Stress Score Percentile

A Financial Stress Score Percentile is shown as a 1-100 ranking where a 1 percentile has the highest probability of failure and a 100 percentile has the lowest probability of failure. A financially stressed company is defined as a firm which has ceased operations following assignment of bankruptcy; voluntarily withdrawn from business operation leaving unpaid obligations; discontinued operations with loss to creditors; or is in receivership or reorganization, or has made some sort of an arrangement for the benefit of its creditors.

If your business has been late with its payments and has UCC filings against it, those will negatively impact its financial stress score percentile.

Credit Limit Recommendation

A D & B Credit Limit Recommendation includes two recommended dollar guidelines:

  1. A conservative limitation, recommending a dollar benchmark if a company’s policy is to extend less credit to decrease risk and
  2. An aggressive limit, proposing a dollar benchmark if a firm’s policy is to extend more credit with potentially more risk.

These guideline amounts are based on a historical evaluation of the credit demand of customers in the U.S. payments database who have a similar profile to your business, with respect to employee size and industry. The guidelines do not address whether your business can pay that amount or if a certain customer’s total credit limit was achieved. Each set of limits comes with an analysis of the risk category your business falls into, or D & B’s assessment of how likely you are to continue to pay your obligations within the agreed-upon terms and how likely you are to go through financial stress in the next twelve months.

D & B Rating

A D & B Rating is meant to help companies quickly assess your business’s size and composite credit appraisal. The rating is based on information in your company’s interim or fiscal balance sheet, plus an overall analysis of your firm’s creditworthiness.

Rating Classifications

The 5A to HH Rating Classifications are used to show business size. This is based on worth or equity as computed by Dun & Bradstreet. The figure matters because your company’s size can be an effective indicator of credit capacity. Dun & Bradstreet assigns these ratings to businesses which have supplied a current financial statement.

Composite Credit Appraisal

This is a number, 1 through 4, and it comprises the second half of your firm’s rating. It reflects Dun & Bradstreet’s overall assessment of your business’s creditworthiness. Dun & Bradstreet’s analysis of company payments, financial information, public records, business age and other important factors, when available, are interpreted in order to generate a Composite Credit Appraisal.

If your company does not provide current financial information, you cannot get a Composite Credit Appraisal rating of better than a 2. Furthermore, the 1R and 2R Rating categories indicate company size based on the total number of employees for the business. These rating categories are assigned to company files which do not contain a current financial statement. Employee Range (ER) Ratings apply to certain lines of business which are tough to classify under the D & B Rating system. These kinds of businesses are assigned an Employee Range symbol based upon the number of employees and nothing more.

As a whole, when Dun & Bradstreet does not have all of the information needed, they will indicate as much in the reports. However, the absence of some pieces of information does not necessarily mean your firm is a poor credit risk.

PAYDEX Score

A PAYDEX Score is Dun & Bradstreet’s proprietary dollar-weighted numerical indicator of how your company has paid its bills over the past year. The score is based upon trade experiences reported to Dun & Bradstreet by a variety of vendors. In addition, the D&B PAYDEX Score ranges from 1 to 100; higher scores signify a better payment performance.

D & B Data

Dun & Bradstreet’s database includes over 250 million companies, which includes around 120 million active firms and about 130 million companies which are out of business but kept for historical reasons. D & B constantly gathers data and works to improve its analyses to try to make its scoring as good as possible.

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