Find out why business-to-business buyers are looking at a business's credit score more and more often when deciding who will get their purchase orders.
A person's credit score can affect their ability to get a loan, rent a place to live, get insurance, and much more. Similarly, businesses also have credit scores, and these scores have a similar ability to help or hurt. Having a good credit score can make all the difference in getting financing, getting good loan terms, and even getting new accounts. Increasingly, business-to-business buyers are looking at a company's credit score when deciding who will receive their purchase orders.
Business vs. Personal Credit Score
A business credit score resembles an individual credit score in some ways, but there are important differences. As with personal scores, there are three main business credit score providers. Dun & Bradstreet Paydex is the most widely used, followed by Experian's Business Credit Ranking Score and Suppliers Credit Risk Score providers) from Equifax.
They all use different sets of information to calculate their scores. However, Dun & Bradstreet Paydex Score only look at payment history. Experian and Equifax look at a number of other factors, which may include the size of the company, how long they've been in business, and collection activity. Dun & Bradstreet and Equifax also earned additional scores beyond the basic. These additional scores assess traits such as the risk of business failure.
What constitutes a business credit score?
A small business credit score only looks at the history of the business, not the owner's personal credit history. However, lenders may also consider the homeowner's personal credit score when considering whether or not to extend credit to a small business. And not all businesses have credit scores. Those with business credit cards will likely have Experian and Equifax scores, but businesses must apply to Dun & Bradstreet for a DUNS number to get a Paydex score.
The numerical scale used to represent a business credit score also differs from consumer scores. Consumer scores range from 300 to 850. Each business score reporting agency uses a slightly different calculation and scoring method, but they generally range from 1 to 100, with 100 being the best score. Additional scores provided by agencies use larger scales. For example, the Equifax business failure score scale runs from 1,000 to 1,880.
Know the score
It's a good idea to monitor your business credit score by requesting a score from each of the three major credit bureaus annually, and before applying for a loan. Unlike consumer credit scores, however, there is no federal law that requires agencies to provide a free annual score. You will have to pay for your score.
If your score is low, such as a 60 Paydex score indicating a history of late payments, you may be able to improve it. One way is to correct any errors by writing to the reporting agency. You can also write to the lender or credit grantor, not the reporting agency, and request a goodwill removal of the late payment item. Once the errors are corrected, you can help your score by paying on time, or before. Dun & Bradstreet awards extra points to companies that pay off their accounts early instead of right when they are due.
A business credit score is a critical element of your company's financial picture and has a powerful effect on your ability to obtain credit, obtain favorable terms on loans and leases, and even obtain clients. Knowing your score, how it was thought of, and how to improve it are vital to managing the financial health of your company.
Factors that influence your credit score
1. Defaults on your credit card
Your credit card payment history is a very important factor in determining your credit score.
A bad credit account can be the most detrimental factor in producing an unfavorable report. In some cases, an account may have been paid in full, but the account still reflects a balance due. Updating the data can mean a substantial improvement in credit history.
Certain types of debt are considered more important or influential than others. These accounts seem to carry more weight when calculating scores. For example, a late payment on a mortgage loan is often more damaging than debt on a credit card.
2. Age of credit history
Your credit score also takes into account how long you've been using credit. For how many years have you had obligations? How old is your oldest account and what is the average age of all your accounts?
A long credit history is helpful (if it's not affected by late payments and other negatives), but a short history can also be fine, as long as you've made your payments on time and don't owe too much.
That's why financial experts always recommend leaving credit card accounts open, even if you no longer use them. The age of the account itself will help improve your credit score. If you cancel the oldest account, your overall score could drop.
3. New credit applications
This refers to how many times you have applied for a loan in recent months. The effect on your score may be minimal, but many new credit applications can create a negative impression on lenders.
The systems that measure your credit score consider your recent credit activity as a sign of your need for loans. If you request many loans in a short time, it may seem to the banks that your economic situation has changed negatively.
4. Variety of lines of credit
This point refers to the different types of credit accounts you have. Both revolving credits, credit cards, individual lines of credit, and installment loans are included.
The variety of credits is important because it shows the experience you have in handling different types of loans. But remember that a varied mix of credits won't help your credit score if you don't use them responsibly.