The creditworthiness of a business is an indication of how likely it is to make timely repayments on a business loan. But it’s more than that – suppliers, vendors, and landlords also look to your business credit score to gauge whether they should do business with you.
But how do these companies determine whether your business is a good or bad credit risk? Do you even know whether you’re a credit risk?
Don’t risk getting rejected by a bank or an important supplier, let’s take a look at what goes into your credit score and explain how you can identify whether you’re a credit risk.
What Goes into Your Business Credit Score?
In the world of personal financing, an individual’s credit score is calculated using a FICO score – an algorithm that takes input like available debt, payment history and other things like the length and types of credit that you have.
In the business world, for the most part, credit is calculated using a Dun & Bradstreet (D&B) PAYDEX(R) Score – a unique, dollar-weighted indicator of a business’ payment performance based on the total number of payment experiences in D&B’s file. This data is gathered from suppliers and vendors that you do business with.
Each payment experience reflects a different supplier and how bills are met within relation to the terms granted.
Just as missing a credit card payment can impact your personal credit score, tardiness in the management of your business financial obligations can bring down your score.
D&B isn’t the only player in the business credit scoring game (although it is the most widely-used for small business lending); late last year FICO also entered the small business credit score arena. Other score issuers include Equifax and Experian, all of which calculate their scores in slightly different ways.
What’s a Credit Profile?
A credit profile is the repository of all your credit history maintained by D&B and other credit monitoring agencies. This includes your PAYDEX or other credit score, credit limit recommendations, financial stress score, and more.
There’s a good chance that a credit profile already exists for your business, and you don’t even know about it. That’s because your credit profile goes back further than the moment you started building credit with suppliers. Credit profiles are often automatically created the minute you officially start your business. Common triggers include registering your business, getting and EIN number, or even taking out insurance.
You can check with D&B or other agencies to see if one exists for your business. If one doesn’t, then it’s a good idea to create one so that you can monitor activity and your score. To do this, you’ll need to get a DUNS number. This nine digit code is used by D&B and other credit bureaus to identify your business and maintain a credit file against it.
How Do I Know if I’m a Bad Credit Risk?
This is where your credit profile comes into play. Once you have access to your file, stay on top of it, review it regularly and correct any inaccurate information to ensure your score stays in good shape. Pay attention to the small details too – such as your business profile (# of employees, revenues, etc.)
You should also be aware that business credit scores range on a scale from 0 to 100 with 75 or more considered an excellent rating.
All the major credit agencies offer tools that can help you monitor your profile and score. You can also see who’s viewed your file (frequently suppliers will check out your file before they extend credit to you) and set-up alerts that let you know how your performance is doing.
What’s One Thing I Can Do To Have a Great Credit Score?
D&B offers lots of advice on how to maintain a good business credit score as well as how to interpret it here (scroll down for useful FAQs).
At the end of the day, the best thing you can do to build and maintain good business credit is to make every effort to pay your bills on time – your payment behavior is the sole factor influencing your PAYDEX or other business credit score. If you can average prompt to 30-day payments on your bills, then you’re typically a low risk of late payment and your credit score will go up. Pay bills ahead of time and you’ll be in an even stronger position.
It’s also a good idea to form an LLC or incorporate your company, that way there’s no risk of co-mingling your personal and business credit scores.