You may already know the basics of consumer credit scoring. But if you're a business owner, you also need to familiarize yourself with another type of score that could greatly impact your company: the commercial credit score.
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By Jeremy M. Simon
Credit card tips mentioned in this article
- Business scores predict the likelihood of late payment.
- Business scores aid business relationships.
- Scores, methods vary from company to company.
- Good habits likely equal improved scores.
- Consumer scores may impact business credit scores.
You may already know the basics of consumer credit scoring. But if you’re a business owner, you also need to familiarize yourself with another type of score that could greatly impact your company: the commercial credit score, also known as the business credit score.
If you don’t know much about business credit scoring, read on to find out more.
Business scores predict the likelihood of late payment. Like a consumer credit score does for borrowers, a business credit score uses credit history to calculate a number indicating a company’s risk. According to Warren Beaty, senior vice president of commercial information solutions at credit bureau Equifax, a firm’s business credit score answers one key question: “What’s the likelihood of the business going severely delinquent?” In other words, the score is an indication of whether a company is likely to make late payments. “The application of a business score is very similar to the application of a consumer score, except it’s targeted to a business,” says Dan Meder, vice president of Experian‘s Business Information Services.
Commercial scores aid business relationships. To decide whether or not to do business with a firm (and on what terms), business partners may consider a company’s commercial credit score. Currently, banks are the primary users of commercial credit scores, says Experian’s Meder. However, it’s not only financial firms that look at these numbers. Commercial scores matter to “anybody that extends credit or has to deal with risk” in a business relationship, says Equifax’s Beaty. This includes credit grantors or lenders, such as banks, credit card issuers, insurance firms and leasing companies. They also matter to nonfinancial firms, such as manufacturers, wholesalers and business service firms, all of whom may exchange goods or services but allow some time to pass before payment is due.
Scores, methods vary from company to company. In order to predict business delinquencies, the companies that issue commercial credit scores look to various types of data. However, unlike the FICO score, which easily has the largest presence in consumer credit scoring world, there is no single score that is entirely dominant in business credit scoring. Instead, there are three leading score issuers — commercial information firm Dun & Bradstreet and credit bureaus Equifax and Experian — all of which calculate their scores in slightly different ways. In Experian’s case, the data falls into five categories:
- Current payment status, including the number of trade relationships, balances and percent delinquent
- Utilization, meaning the amount of credit used compared to amount available
- Derogatory items, such as collections, liens and bankruptcy judgments
- Historic payment behavior, or delinquency trends over time
- Demographic information, such as the age of the business, the type of business, number of employees and number of inquiries
Additionally, the scoring algorithms vary from company to company. Experian’s Intelliscore Plus credit scoring formula creates a number between 1 and 100. “The higher the score, the better the risk,” says Meder. Via a scoring system that ranges from 101 (higher risk) through 992 (less risk), Equifax’s Small Business Credit Risk Score for Financial Services helps predict the likelihood a small business will become severely delinquent on financial services accounts within 12 months. Equifax’s Small Business Credit Risk Score for Suppliers predicts severe delinquency or change-offs on supplier accounts or bankruptcy within 12 months, but its scores range only from 101 to 816. Meanwhile, D&B’s PAYDEX Score is a “unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors,” according to D&B’s online glossary. “The D&B PAYDEX Score ranges from 1 to 100, with higher scores indicating better payment performance.”
Good habits likely equal improved scores. Equifax says making prompt payments is the biggest factor toward improved commercial scores. Additionally, Experian’s Meder says establishing trade relationships and managing utilization rates can also help. At the same time, stay out of collections, avoid legal trouble and prevent bankruptcies that can negatively impact scores, Meder says. Businesses should also be on the lookout for errors. “In addition to keeping your payments current, debt down and revenues growing (the best ways to assure a strong credit profile),” says D&B’s website, the most effective methods of protecting your credit include regularly monitoring what’s on your report quarterly and identifying any information you think is wrong. “Notify creditors and D&B if you find any errors or discrepancies. You should also check your credit report for the three months prior to applying for a loan,” D&B says. Businesses can order both credit scores and histories — for a price.
Consumer scores may impact business scores. A business owner’s consumer score can be used in calculation of the credit score for the business. “Equifax does offer a blended option for the Small Business Credit Risk Score for Financial Services and the Small Business Credit Risk Score for Suppliers. Both of these scores can be used with commercial-only data or commercial and consumer credit data,” says Jennifer Costello, spokeswoman for Equifax, in an e-mail. “For example, the blended option for the Small Business Credit Risk Score for Financial Services utilizes consumer credit information on the business owner, principal or guarantor along with public records, firmographics and supplier credit history data and lease payment and banking information.” However, moving in the opposite direction, “a business score can neither help nor hurt a consumer credit score,” Equifax’s Beaty says.
Meanwhile, Experian also offers a score that combines the business and consumer credit information on a business owner. Therefore, “the consumer data can have a huge impact on the score,” Meder says. As a result, business owners should also consider their personal credit activity. “What this does highlight is the importance of managing both your consumer and business credit scores, because they can both help you in business transaction,” Meder says.