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How Are Credit Scores Determined?

At some point, your business will need to bolster its capital through business credit cards, small business loans, lines of credit or charge cards. Accessing capital is easier and quicker when you have a good business credit score. 

Business credit score versus personal credit score

While your personal credit score measures your individual credit history, your business credit score measures the creditworthiness of your business. Like your personal credit score, your business score considers factors such as your company's history of making one-time payments, past collection, bankruptcies (if any), and others.

  • Business credit scores range from 0 to 100, unlike personal credit scores that have a 300-850 range. Additional scores may also be assigned to evaluate business risk.
  • Your business size may be considered to calculate your business credit score. Additionally, your industry may be scrutinized: if the service or product you're offering has decreased demand, you may be perceived as a risky candidate.
  • Business credit reports and scores contain the accounts under your company's name and do not consider your personal account. However, credit card issuers will look at your business as well as personal credit prior to offering terms.
  • You are entitled to a free credit report from the big three credit bureaus – Experian, Equifax and TransUnion – once annually. You can also request your FICO score from credit card issuers at no charge. However, you will need to pay to get your company's credit report and score.
  • Your personal credit reports cannot be pulled out by any entity, and only the concerned parties can legally access them. In contrast, the information on your business credit reports is public, and anyone can access it as long as they pay for it.
  • Algorithms used to calculate business credit scores differ across bureaus. Consumer credit bureaus usually base their scores on Fair Isaac Corp.'s algorithms.

How are business credit scores calculated?

The three major business credit bureaus are Equifax, Experian and Dun & Bradstreet. As mentioned above, they use their own proprietary methods to calculate scores. They may also calculate scores to  judge different metrics such as the probability of paying back the loan or whether the company can stay solvent.

The bureaus also collect information about your business differently. They source the information from credit card issuers, trade associations, vendors and banks. The bureaus may verify this information through third-parties.

Here's a look at how the big three business credit bureaus calculate your score.

Dun and Bradstreet

Dun and Bradstreet uses a PAYDEX score to calculate business risk on a scale of 0 to 100. The score is based on payment data provided to the bureau or to the data collection services partnering with the bureau. Besides this data, a credit score and financial stress score is used to advise the appropriate amount that lenders can approve.

You can start by filing a DUNS number on the bureau's website for free, and records of your payments with a minimum of four lenders is necessary to get a PAYDEX score. The scores are rated as :

  • Low risk of late payments for 80-100
  • Medium risk of late payments for 50-79
  • High risk of late payments for 0-49

Your credit score is assigned on a 1-5 scale, where 1 is the best score. The scores compares your business with other companies with similar payment histories to understand your probability of paying on time.

The financial stress score ranges from 1 to 5. Here too, Dun and Bradstreet makes comparisons with other companies who share similar business and financial attributes. The score takes a broad look at your company instead of focusing only on payment history.

Experian

You get a CreditScore report from Experian, which consists of a business credit score and other information, including account and payment history as well as public records. The score – which considers multiple factors - is assigned on a scale of 0 to 100. They include :

  • Number of years in business
  • Collection amounts over the last seven years
  • Lines of credit you've applied for in the last nine months
  • Your 12-month payment history
  • New lines of credit opened in the last six months
  • Percentage of available credit
  • Number of payments on which you have been 1-30, 31 or more days late
  • Number of lines of credit where payment is due in less than or more than 30 days

 

Small businesses that have a good credit profile should have no problem being deemed low or medium risk.

Equifax

Equifax has a payment index that rates companies on a scale of 100. Similar to Dun and Bradstreet's   PAYDEX score, the payment index assesses whether or not and in how many instances you have made on-time payments. It considers data from creditors and vendors.

Equifax also assigns a credit risk score that evaluates the probability of your business defaulting on payments. The scores are assigned on a scale of 101 to 992; they consider the following factors:

  • The size of your company
  • The duration of time that has passed since your oldest financial account was opened
  • The available credit on revolving credit accounts.
  • Instances of delinquency or charge-offs for vendor invoices and other non-financial transactions in two or more billing cycles.

 

The bureau's business failure score assesses the probability of your company shutting its doors. It is measured on a scale of 1000 to 1880, and considers the following:

  • The duration of time that has passed since your oldest financial account was opened.
  • The worst payment status across all transactions over the past 24 months.
  • The total balance versus the credit utilization in the past three months.
  • Instances of delinquency or charge-offs for vendor invoices and other non-financial transactions in two or more billing cycles.

 

Errors on business credit reports are common. One reason for this is the business identification method, which uses only the business name and street address, which may cause confusions between similarly worded businesses located on the same street. As with personal credit reports, you can dispute errors on your business reports with the bureaus. 

 


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Category: Small Business Financing

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