Written by Janet Gershen-Siegel

Understanding Credit Score, Business, and Finance

Credit score, business, and finance can seem like foreign terms. What do they really mean?

Does your business have a good company credit score?

So you are presently in business, and you are working hard to keep on top of your small business credit scores. Or perhaps you are not, and have decided now is a good time to start. Or perhaps your small business is reasonably new, and this is the first time you’re doing this. Whatever your circumstance, you’ve most likely asked this question at least once.

So are my credit scores any good? And are they any better than my competition’s?

Let’s have a look at the three commercial credit reporting agencies and solve this mystery once and for all.

Your Business’s Experian Business Credit Score

Experian’s Credit Score report includes a company credit score as well as other information, such as account histories, payment trends, and public records. Experian business credit scores range from 1 to 100. In contrast to Dun & Bradstreet’s PAYDEX score and Equifax’s payment index, Experian considers a variety of factors. So they don’t just look at payment histories.

Factors

The factors which go into the calculation include:

• Lines of credit your business has on application in the last nine months
• New lines of credit you have opened in the past six months
• Your small business’s years in business
• Payment history in the last twelve months
• Lines of credit in use in the past six months

More Factors

• Collections totals within the previous seven years
• Percentage of available credit in use
• Amount of payments 1 – 30 days late, or 31 days or more overdue
• Number of non-net-30 lines of credit. So that means the payment is due in fewer or greater than 30 days.

Often, even businesses which use credit responsibly will get a medium-low risk rating. As might be expected, well-established businesses will have a less complicated time getting a low-risk rating.

A good Experian score for your company is 76-100.

Your Small Business’s PAYDEX Score

Dun & Bradstreet’s PAYDEX score runs from 0 to 100. A PAYDEX score has its basis in payment details which are either on report to the bureau or on report to data-gathering companies partnering with the bureau.

D & B uses this information, alongside a credit score and financial stress score, in order to recommend how much credit a creditor ought to extend to your business.

Getting a PAYDEX Score

To get a PAYDEX score, you are required to file for a DUNS number by using Dun & Bradstreet’s web site. The number is free. Plus the agency needs to have reports of your payments with four or more vendors. Your company’s PAYDEX score indicates if your payments are generally made on schedule or ahead of schedule. As you may expect, a higher number is better.

Score Details

The scores work out as follows:

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

D&B Business Credit Score

Your business’s credit score runs from 1 to 5. 1 is the very best score. This matches your company with other businesses with comparable payment histories.

The number reveals how often those companies tend to pay on time. This information can help creditors to grasp your company’s standing. However, it does not really reflect all of the payment records from your small business.

Financial Stress Score

The financial stress score also runs from 1 to 5. This score matches your company with other companies sharing similar financial and business traits. These similarities are in areas like size or amount of time in business.

This score demonstrates how often those companies tend to pay on time. As before, 1 is the best score. This rating is a more comprehensive investigation of the business landscape, rather than analysis of your small business’s genuine payment history.

A great PAYDEX score for your business is 80-100.

Your Company’s Equifax Score

Equifax shows three distinct business determinations on its business credit reports. These are the Equifax payment index, your company’s credit risk score, and its business failure score.

Equifax Payment Index

Much like the PAYDEX score, Equifax’s payment index, which is on a scale of 100, shows how many of your company’s payments were made in a timely manner. These include both records from creditors and vendors. However, it’s not designed to anticipate future conduct, which is what the other two scores are for.

Equifax Credit Risk Score

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

• Available credit limit on revolving credit accounts, e. g. credit cards
• Your business size
• Proof of any non-financial transactions (e. g. vendor invoices) which are overdue or were charged off for two or more billing cycles
• Length of time since the opening of the oldest financial account

Equifax Business Failure Score

Finally, Equifax’s business failure score looks at the chance of your business shutting down. It runs from 1,000 to 1,600, evaluating these elements:

• Total balance to total current credit limit average utilization in the previous three months
• How long since the opening of the oldest financial account
• Your business’s worst payment status on all trades in the last 24 months
• Documentation of any non-financial transactions (e. g. merchant invoices) which are overdue or have been charged 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 company is as follows:

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

Building Business Credit

Apply your new knowledge of credit scores and do some business credit building!

Corporate credit is credit in a small business’s name. It doesn’t attach to a business owner’s personal credit, not even if the owner is a sole proprietor and the only employee of the company. Hence, an entrepreneur’s business and individual credit scores can be very different.

The Advantages

Given that business credit is separate from personal, it helps to secure a small business owner’s personal assets, in case of litigation or business bankruptcy. Also, with two distinct credit scores, a business owner can get two separate cards from the same vendor. This effectively doubles purchasing power.

Another benefit is that even startups can do this. Visiting a bank for a business loan can be a formula for disappointment. But building company credit, when done the right way, is a plan for success.

Consumer credit scores rely on payments but also additional elements like credit use percentages. But for corporate credit, the scores actually merely depend on if a small business pays its invoices on time.

The Process

Growing company credit is a process, and it does not occur without effort. A business must actively work to establish business credit. Nevertheless, it can be done easily and quickly, and it is much more efficient than developing individual credit scores. Merchants are a big component of this process.

Undertaking the steps out of sequence will lead to repetitive rejections. No one can start at the top with corporate credit. For example, you can’t start with store or cash credit from your bank. If you do, then you’ll get a denial 100% of the time.

Before Even Starting Business Credit Building – Do These Things First

Get started by taking charge of some areas where you can prevent future credit denials.

Small Business Credibility

A company must be trustworthy to lenders and vendors. Due to this fact, a corporation will need a professional-looking web site and e-mail address, with website hosting bought from a merchant like GoDaddy. And company phone and fax numbers ought to have a listing on ListYourself.net.

Likewise the company telephone number should be toll-free (800 exchange or comparable).

A company will also need a bank account devoted solely to it, and it needs to have all of the licenses necessary for running. These licenses all have to be in the precise, correct name of the corporation, with the same corporate address and telephone numbers. Bear in mind that this means not just state licenses, but potentially also city licenses.

Working with the Internal Revenue Service

Visit the Internal Revenue Service web site and obtain an EIN for the small business. They’re totally free. Select a business entity such as corporation, LLC, etc. A small business can start off as a sole proprietor but will most likely want to switch to a variety of corporation or partnership to decrease risk and make the most of tax benefits.

A business entity will matter when it concerns taxes and liability in case of a lawsuit. A sole proprietorship means the owner is it when it comes to liability and taxes. Nobody else is responsible.

If you are a sole proprietor, then at the very least be sure to file for a DBA (‘doing business as’) status. If you do not, then your personal name is the same as the business name. As a result, you can wind up being directly responsible for all company debts.

Additionally, according to the Internal Revenue Service, by having this arrangement there is a 1 in 7 possibility of an IRS audit. There is a 1 in 50 probability for corporations! Avoid confusion and noticeably lower the chances of an Internal Revenue Service audit as well.

A Word about Business Credit Building

Always use credit responsibly! Don’t borrow more than what you can pay back. Keep an eye on balances and deadlines for repayments. Paying off punctually and fully will do more to elevate business credit scores than almost anything else.

Building corporate credit pays off. Good business credit scores help a corporation get loans. Your lender knows the small business can pay its financial obligations. They understand the corporation is bona fide. The company’s EIN attaches to high scores, and credit issuers won’t feel the need to call for a personal guarantee.

Business credit is an asset which can help your company for many years to come.

Takeaways for Credit Score, Business, and Finance

Keep your numbers in line and good things will happen.  Learn more here and get started toward understanding credit score, business, and finance.