Do You Need to Know the Credit Rating for a Small Business?

So, what is a credit rating for a small business? Does your company have a good commercial credit score? We break down the 3 big commercial CRAs’ scores.

So you are presently in business, and you are working hard to keep on top of your commercial credit scores. Or possibly you aren’t, and feel now is a good time to start. Or maybe your business is relatively new, and this is the very first time you’re doing this.

No matter what your situation, you have most likely asked this question at least once. So are my credit ratings any good? Do I even have credit ratings yet?

Let’s have a look at the three company credit reporting bureaus and solve this mystery at last.

Credit Rating for a Small Business: Your Small Business’s Experian Company Credit Score

Experian’s Credit Score report includes a company credit score along with other facts, including account histories, payment trends, and public records. Experian company credit scores run the gamut from 1 to 100. Unlike Dun & Bradstreet’s PAYDEX score and Equifax’s payment index, Experian takes into account a variety of factors, and not simply payment histories.

Elements of Experian Scores

The elements which go into the calculation include:

• Lines of credit your business applied for in the most recent nine months
• New lines of credit launched in the most recent six months
• Your company’s years in business
• Payment history in the past twelve months
• Lines of credit in use in the past six months
• Collections amounts within the last seven years
• Percent of available credit in use
• Amount of payments one – 30 days overdue, or 31 days or more late
• Number of non-net-30 lines of credit (that means the payment is due in less or greater than 30 days).

However….

Generally, even businesses that use credit sensibly will get a medium-low risk rating. As might be expected, older companies will have an easier time getting a low-risk rating.

A great Experian score for your business is 76-100.

Credit Rating for a Small Business: Your Company’s PAYDEX Score

Dun & Bradstreet’s PAYDEX score ranges from 0 to 100. A PAYDEX score has a basis in payment records which are on report to the CRAs. Or they are a part of reports to data-gathering businesses partnering with the bureau.

D & B uses this information, along with a credit score and financial stress score, in order to advise the amount of credit a creditor should extend to your company.

So as to have a PAYDEX score, you must file for a DUNS number via Dun & Bradstreet’s site. The number is absolutely free. In addition the credit reporting agency must have records of your payments with four or more vendors.

Your business’s PAYDEX score shows if your payments are typically made without delay or ahead of schedule. As you might expect, a greater number is better. The scores work out as follows:

80-100: A low risk of late payments.
50-79: A medium risk of late payments.
0- 49: A high risk of late payments.

PAYDEX Ranges

Your business’s credit score ranges from 1 to 5. 1 is the best score. This matches your business with other companies with comparable payment histories. The number shows how often those companies tend to pay promptly.

This data can really help lenders to comprehend your company’s standing. However, it does not genuinely show all of the payment data from your small business.

D&B Financial Stress Score

The financial stress score also ranges from 1 to 5. This score matches your company with other small businesses sharing similar financial and business traits. These similarities are in areas such as size or amount of time in business.

This score shows how often those comparable businesses tend to pay on time. As before, 1 is the best score. This rating is a broader evaluation of the business landscape, rather than analysis of your company’s authentic payment history.

A good PAYDEX score for your company is 80-100.

Credit Rating for a Small Business: Your Business’s Equifax Score

Equifax displays three separate business determinations on its business credit reports. These are the Equifax payment index, your small business’s credit risk score, and its business failure score.

Much like PAYDEX, Equifax’s payment index, which is on a scale of 100, shows how many of your business’s payments were made promptly. These include both data from creditors and vendors. However, it’s not meant to forecast future actions, which is what the other two scores are for.

Equifax’s credit risk score assesses how likely it is your small business will become severely delinquent on payments. Scores run from 101 to 992, and they evaluate:

• Available credit limit on revolving credit accounts, e. g. credit cards.
• Your company size.
• Proof of any non-financial transactions (e. g. vendor invoices) which are overdue or in a charge off for two or more billing cycles.
• Amount of time since the opening of the earliest financial.

Equifax Business Failure Score

Lastly, Equifax’s business failure score looks at the risk of your small business shutting down. It runs from 1,000 to 1,600, judging these aspects:

• Total balance to total current credit limit average utilization in the last three months.
• The length of time since the opening of the earliest financial account.
• Your small business’s worst payment status on all trades in the previous 24 months.
• Evidence of any non-financial transactions (e. g. vendor invoices) which are overdue or in a charge off for two or more billing cycles.

For the credit risk and the business failure scores, a score of 0 means bankruptcy.

A great Equifax score for your small business is as follows:

• Payment Index 0-10.
• Credit Risk score 892-992.
• Business Failure score 1400-1600.

Bonus: How to Boost The Credit Rating for a Small Business

Improving your small business credit scores will make it easier for you to get loans and credit, and you will get better terms for both.

It can also be the difference between wanting company credit and loans, and not getting them at all. So here are three quick techniques to boost your company credit scores.

3. Do your best to improve your payment history

How do you make your small business’s payment history better? It’s easy. Just pay your invoices punctually, and as close to ‘in full’ as you possibly can. That can be easier said than done.

The reality is, in the same way that you ought to keep your personal spending within your means, you also must keep your company spending realistic.

No one can foresee the future. All anyone can do is to go by whatever data is out there. Also it should be analyzed in a way that is not excessively optimistic.

For new companies, that should mean taking a look at industry trends. For more companies that are not so new, it means meticulously examining your small business’s performance. This should be under all types of conditions.

Business Prudence

Hence if it appears your company can potentially make $1 million next quarter, but you need to borrow money now, do not borrow beyond $1 million. And you probably should borrow even less than that.

You need to keep your business spending in check and not wager the business’s future on a hunch. These are both great ways to get your credit balances down. As a result, that will boost your payment history.

Consider that anything could happen, such as: your biggest supplier could go out of business, or your best worker could quit, or important crops could fail or any of a number of setbacks could happen. Being daring in business can often be a good idea. However, you still need to pay your business’s invoices.

2. Credit History Length Matters

This is essentially for how much time your company has been using small business credit. Typically newer companies will have short credit histories. While there is not a lot you can particularly do about that and there’s no real hack for that, per se, do not despair.

Credit reporting bureaus will also review consumer credit score and your very own history of payments. If personal credit is good, and particularly if you have a fairly long credit history, then consumer credit can come to the rescue of your corporate.

Naturally the opposite is also true. If your personal credit history is bad, then it will influence your corporate credit scores until your business and personal credit can be split up.

1. Stay on top of your small business credit scores

This means routinely getting and reviewing both your small business and personal credit reports. This is because, for new businesses and sole proprietorships, credit bureaus will often look at your personal credit at the same time.

Therefore, you will have to stay on top of both sets of scores, because credit scoring reports can have mistakes and you have the right to dispute them. However, you will not know there are any errors unless you check.

Disputing a credit report inaccuracy normally involves sending a paper letter with copies of any proofs of payment with it. These are typically going to be receipts and/or cancelled checks. Never send the originals. Always send copies and keep the originals.

Precisely detail any charges that you are disputing. Make certain to use certified mail so you will have proof that you sent your dispute.

If there are no mistakes on your credit reports, then of course you can not dispute anything. And please don’t try to pull a fast one and dispute your credit score if there is really nothing wrong with it! Credit reporting agencies, understandably so, are not going to like that.

Focus on your small business credit scores and the overall financial health of your company and you will be a lot more likely to succeed.

Credit Rating for a Small Business: Takeaways

Keep your numbers up and good things will happen. Learn more here and get started toward building the credit rating for a small business.