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Everything You Need to Know About Your PAYDEX and Other D&B Reports

March 5, 2020


PAYDEX Credit Suite

PAYDEX is important to your business credit.  In fact, the D&B PAYDEX is one of the most common tools used by lenders to determine credit risk.  There are a couple of reasons for this. First, Dun & Bradstreet is one of the largest and most commonly used business credit reporting agencies.   Next, the PAYDEX score is the most like the personal FICO score, so it is easy for lenders to understand. 

The PAYDEX is Important, But It’s Not the Only Thing the Dun & Bradstreet Has on You

Though the PAYDEX is the most commonly used, there are other reports that Dun & Bradstreet issue that can be helpful to lenders.  You need to know about all of them, because you never know what all a lender will look at. 

Discover our Get Business Credit guide, with everything you need to know about building credit for your business.

The Quick and Dirty on the PAYDEX

The PAYDEX Score is Dun & Bradstreet’s score that tells the lender how well your business has paid the bills over the past year. D & B bases this score on trade experiences documented by vendors.  It ranges from 1 to 100.  The higher the score, the lower the perceived risk. In business credit terms, it is the most similar to the personal FICO score. This is why it is the most popular business credit option among lenders. 

In addition to the PAYDEX, D&B issues the following options for lenders. 

PAYDEX and Your Delinquency Predictor

To estimate how likely a company is to be late in paying debts, Dun & Bradstreet uses predictive models. They use predictive scoring, which takes past data to try to predict what will happen in the future. They do this by figuring out the potential risk of a future decision.  Then they compare the historical information to a future event. Thus, predictive scoring only represents a statistical probability. It is not a guarantee.

Financial Stress Percentile

The Financial Stress Percentile compares companies in categories such as region, industry, number of employees, or number of years in the business. Financial Stress Score Norms determine an average score and percentile for like firms. 

Financial Stress Score

Dun & Bradstreet generates Financial Stress Scores to predict how likely it is a business will fail over the next twelve months.  These scores range between 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.

Financial Stress Risk Class

This is a rating from D&B that places business in classes from 1 to 5. Class 1 includes businesses least likely to fail, while class 5 includes those firms most likely to fail. Therefore, a D & B customer can rapidly separate their new and existing accounts by risk and then determine how to proceed. If your business is shown as being Discontinued at This Location; Higher Risk; or Open Bankruptcy, you are going to automatically get a 0 score.

Financial Stress Score Percentile

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 a company as financially stressed, that indicates it has stopped operations following assignment of bankruptcy, voluntarily withdrawn from business operation with unpaid obligations, or closed up shop with a loss to creditors.  It could also mean a company is in receivership, reorganization, or has made some sort of an arrangement for the benefit of creditors.

Supplier Evaluation Risk Rating

The Supplier Evaluation Risk Rating (also called a SER Rating) predicts how likely it is a company will get legal relief from 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 calculate the SER Rating, on a scale of 1 – 9.

A 1 means your company is least likely to fail to pay suppliers. A 9 is the opposite, showing the highest likelihood.

Credit Limit Recommendation

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

  • A conservative limit, recommending a dollar benchmark if a company’s policy is to extend less credit to minimize risk and
  • 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 levels on a historical evaluation of the credit demand for similar businesses, with respect to employee size and industry. They assess how likely a business is to continue to pay obligations according to the agreed-upon terms, and how likely it is to experience financial stress in the next twelve months.

D & B Rating

A D&B Rating helps lenders assess a business’s size and credit potential. Dun & Bradstreet bases this rating on details in your company’s balance sheet and an overall evaluation of the firm’s creditworthiness. The scale goes from 5A to HH. 

Composite Credit Appraisal

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 supply current financial information, you cannot get a Composite Credit Appraisal rating of better than a 2. The 1R and 2R ratings show company size only based on the total number of employees.  Consequently, these ratings are assigned if your company’s file does not contain a current financial statement.

Employee Range (ER) Ratings apply to specific lines of business that are hard to put into categories under the D & B Rating system. These kinds of businesses receive an Employee Range symbol based upon the number of employees and that is all.

In general, when Dun & Bradstreet does not have all of the information they need, they will show that in their reports. However, omitted information does not necessarily mean your firm is a poor credit risk.

Discover our Get Business Credit guide, with everything you need to know about building credit for your business.

Now, How Do You Get Started Building Your PAYDEX?

The first step is to ensure your business is set up properly to separate it from yourself.  You don’t want business credit accounts reporting to your personal credit. They need to report to your business credit only.  How do you make this happen? Glad you asked. 

Your Business Needs Separate Contact InformationPAYDEX Credit Suite

The first step in setting up a foundation of fundability is to ensure your business has its own phone number, fax number, and address.   Then, when you apply for credit accounts, use that information and not your personal information.   

That doesn’t mean you have to get a separate phone line, or even a separate location.  You can still run your business from your home or on your computer if that is what you want.  You do not even have to have a fax machine.  

In fact, you can get a business phone number that will work over the internet instead of phone lines.  In addition, the phone number will forward to any phone you want it to so you can still use your personal cell phone or landline.   Whenever someone calls your business number it will ring straight to you. 

You can use a virtual office for a business address. How do you get a virtual office?  What is that?  It’s not what you may think.  This is a business that offers a physical address for a fee, and sometimes they even offer mail service and live receptionist services.  In addition, there are some that offer meeting spaces for those times you may need to meet a client or customer in person. 

You Must Have an EIN

The next thing you need to do is get an EIN for your business.  This is an identifying number for your business that works similar to how your SSN works for you personally.  Some business owners use their SSN to apply for business accounts. This is what a lot of sole proprietorships and partnerships do. 

However, it really doesn’t look professional to lenders.  It can cause your personal and business credit to get mixed up.  When you are looking to increase Fundability™, you need to apply for and use an EIN. You can get one for free from the IRS.

Incorporating is Absolutely Necessary

This is the most important step separating your business from yourself.  Incorporating your business as an LLC, S-corp, or corporation is necessary to fundability as well.  It lends credence to your business as one that is legitimate and it  offers some protection from liability. 

Which option you choose does not matter as much for business credit and  fundability as it does for your budget and needs for liability protection.  The best thing to do is talk to your attorney or a tax professional.  What is going to happen is that you are going to lose the time in business that you have. 

When you incorporate, you become a new entity. You basically have to start over.  You’ll also lose any positive payment history you may have accumulated. 

This is why you have to incorporate as soon as possible.  Not only is it necessary for fundability and for building business credit, but so is time in business.  The longer you have been in business the more fundable you appear to be.  That starts on the date of incorporation, regardless of when you actually started doing business. 

A Separate Business Bank Account Is Vital

You have to open a separate, dedicated business bank account.  There are a few reasons for this.  First, it will help you keep track of business finances.  It will also help you keep them separate from personal finances for tax purposes. 

There’s more to it however.  There are several types of funding you cannot get without a business bank account.  Many lenders and credit cards want to see one with a minimum average balance.  In addition, you cannot get a merchant account without a business account at a bank. That means, you cannot take credit card payments.  Studies show consumers tend to spend more when they can pay by credit card. 

Discover our Get Business Credit guide, with everything you need to know about building credit for your business.

How Do You Establish a PAYDEX Score?

Once you are certain your business is established as an entity separate from you as the owner, you need a DUNS Number. This 9-digit number is a unique identifying number that works to establish a business credit file with D & B. A DUNS (Data Universal Number System) works to keep accurate and timely data on over 250 million businesses around the globe. You want your business to be one of them.

From an identification standpoint, it makes a lot of sense. With the use of this identifier, errors can be kept to a minimum. As a result, Dun & Bradstreet will never confuse your business with someone else’s.

Dun & Bradstreet requires that you register your company for free on their site to get a number. There are a few other ways to get a DUNS if your business belongs to a special class.  These include if it is a US government contractor or grantee, your company is Canadian, or you are working as an Apple developer

Registration is fast and simple. Once you have said yes to their Terms and Conditions, you are taken straight to a dashboard where you either ask for a DUNS number or you look up to see if your business is already listed. If it is already on the big list, then you click on your company’s name to make any needed changes. 

Understanding the PAYDEX and How Dun & Bradstreet Works Is Important

By understanding what the D&B PAYDEX is, how it works, and how lenders use it, you can have a better feel for how fundable your business is.  The PAYDEX is one measure of business credit, and business credit is just one piece of a business’s overall fundability

While other aspects of fundability are important, business credit is the one that is easiest to control.  All you have to do is make your payments consistently on-time. If you do that, you PAYDEX will be fabulous and you will be able to get whatever funding you need to run and grow your business. 

About the author 

Faith Stewart

Faith has a BBA with a major in Accounting, and a combined 20 years of experience in the fields of finance and account.

Before switching to writing, she spent 10 years working in various areas of small business and personal finance and accounting, including working as a public auditor at BKD, LLP, Financial Director at Central Arkansas Development Council, and Commercial Credit Analyst at Farmer's Bank and Trust.

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