Similar to your personal credit rating, businesses also have a business credit rating that potential lenders use to determine its credit worthiness. Unlike the FICO® credit score, there is no universal scoring system lenders use for determining the credit worthiness of a business.
While the majority of lenders utilize FICO® for basing the credit worthiness of a consumer when it comes to businesses lenders take many other factors into consideration. This includes but not limited to your business credit score, company size, annual sales, classification, years in business and financials.
Where a personal credit rating is based on financial information provided by credit card companies, retail establishments, financial institutions and public records a business credit rating is determined by information supplied by the business owner and data gathered from lenders, vendors, suppliers, and other trade accounts.
For this reason, potential lenders may be different from one another in their evaluation of your business’ credit history by emphasizing certain qualifications more than others. Like most industries, there is a specialized language involved with business credit ratings.
The following is a sample of the most common terms used as well as their definitions from Dun & Bradstreet (a business credit bureau):
- Average High Credit / Highest Credit –In order to put a business’s credit in perspective, these are based on the total amount of credit owed as compared to the industry as a whole.
- Business in Good Standing –Includes any problems with the business overall.
- Commercial Credit Score –A score that predicts the chance of an account becoming severely delinquent within one year.
- Comprehensive Report –This is a report that includes a combination of several D&B business credit reports painting a more complete picture of your company’s credit history. It includes the results of your PAYDEX analysis, the company’s credit score and Financial Stress class, as well as any public filings or liens, the business’s history and operations (including when it filed for incorporation, annual financial statements, facilities, affiliations, and number of employees).
- Credit Score Class –This is part of the D&B assessment that gauges payment habits to determine how likely it is that a potential account will be delinquent in the next 12 months. The scoring can range from 1 to 5 with 1 being the score assigned for the lowest risk and 5 for the highest.
- Financial Stress Score –This is part of the D&B assessment that analyzes the Financial Stress that a business is experiencing in order to predict how likely it is that a business will fail in the next 12 months.
- PAYDEX –This is D&B’s primary assessment that analyzes how likely it is that a company will make its future payments on time. Having a paydex score of 80 for a business can be compared to having a 720 personal credit score. In order to generate a paydex you will need to have a minimum of four trade experiences reporting on your DNB file.
Here are a few sample business credit reports:
To order your business credit reports:
I also encourage you to familiarize yourself with the top ten business credit bureaus in the industry. It’s important that you understand your business credit rating and what you can do to build a stronger business credit file. This will enable your business to obtain the financing it needs at the best available rates.
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About the Author
Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insider’s Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.