Ultimate Guide to Business Credit Scores

How Business Credit Scores are Calculated

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Understanding how business credit scores are calculated is crucial for any small business owner looking to maintain a healthy financial profile. Unlike personal credit scores, which follow a relatively standardized model, business credit scores can vary significantly depending on the reporting agency and the specific factors they prioritize. This complexity often leaves entrepreneurs wondering exactly what goes into their score and how they can influence it positively. In this section, we’ll demystify the process by breaking down the key components that credit bureaus consider when determining your business credit score. By gaining insight into these factors, you’ll be better equipped to manage and improve your company’s creditworthiness, opening doors to better financing options and business opportunities.

Factors influencing business credit scores

Understanding how business credit scores are calculated is crucial for small business owners looking to maintain a healthy financial profile. While the exact algorithms used by credit bureaus are proprietary, several key factors consistently influence these scores:

Payment history

Payment history is arguably the most critical factor in determining a business credit score. This metric reflects how consistently a company pays its bills and financial obligations on time. Late payments, missed payments, or defaults can significantly damage a business credit score. Conversely, a track record of timely payments can boost the score substantially.

Credit utilization

Credit utilization refers to the amount of credit a business is using compared to its available credit limit. Generally, lower credit utilization is viewed more favorably. For example, if a business has a credit limit of $100,000 and is using $30,000, its credit utilization ratio is 30%. Most experts recommend keeping this ratio below 30% to maintain a good credit score.

Length of credit history

The age of a business’s credit accounts plays a role in its credit score. Older accounts that have been managed well over time can positively impact the score. This factor encourages businesses to establish credit early and maintain long-standing relationships with creditors and suppliers.

Public records

Public records, such as bankruptcies, liens, or judgments against a business, can severely impact its credit score. These records are typically viewed as red flags by creditors and can remain on a business credit report for several years.

Company size and industry risk

Credit bureaus often consider the size of a company and the inherent risk associated with its industry. Larger, more established businesses may be viewed as more stable, while certain industries might be considered higher risk due to market volatility or other factors.

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Key Takeaways

Payment history is the most crucial factor in business credit scores.
Credit utilization should ideally be kept below 30%.
Longer credit histories generally contribute positively to credit scores.
Public records can significantly impact business credit scores.
Company size and industry risk are considered in score calculations.

Tips

Set up automatic payments to ensure bills are paid on time.
Regularly monitor your credit utilization and avoid maxing out credit lines.
Establish business credit early and maintain long-term relationships with creditors.
Address any public records promptly and work to resolve outstanding issues.
Stay informed about industry trends and risks that might affect your credit score.

Scoring models used by different agencies

While the major business credit reporting agencies share some common factors in calculating credit scores, each employs its own unique scoring model. These models are designed to assess the creditworthiness and financial stability of businesses, but they may weigh various factors differently or use proprietary algorithms.

Dun & Bradstreet’s PAYDEX score, for instance, focuses heavily on payment history. This model evaluates how quickly a business pays its bills compared to the terms agreed upon with vendors and creditors. The score ranges from 1 to 100, with higher scores indicating more prompt payments.

Experian’s Intelliscore Plus model takes a more comprehensive approach. It considers a wider range of factors, including credit utilization, payment trends, company size, and industry risk. This model generates a score between 1 and 100, with 100 representing the lowest risk.

Equifax’s Business Credit Risk Score uses a scale of 101 to 992 and incorporates data from both credit reports and public records. This model places significant emphasis on the business’s payment history, outstanding debts, and credit utilization ratio.

The FICO SBSS (Small Business Scoring Service) score, widely used by the Small Business Administration and other lenders, combines both personal and business credit data. It evaluates factors such as business credit history, personal credit history of business owners, and general business demographics. The FICO SBSS score ranges from 0 to 300, with higher scores indicating lower risk.

Each of these scoring models aims to provide a comprehensive picture of a business’s creditworthiness, but they may yield different results due to their unique methodologies and data sources. This is why it’s crucial for business owners to familiarize themselves with multiple scoring models and monitor their scores across different agencies.

Click to view Key Takeaways & Tips

Key Takeaways

Different credit agencies use unique scoring models.
Dun & Bradstreet focuses primarily on payment history.
Experian considers a broad range of factors including industry risk.
Equifax incorporates both credit report data and public records.
FICO SBSS combines personal and business credit information.

Tips

Regularly check your business credit scores from multiple agencies.
Understand the specific factors each scoring model prioritizes.
Tailor your credit-building strategies to improve scores across all models.
Don’t rely solely on one agency’s score when assessing your business’s creditworthiness.
Consider how different lenders might interpret various scoring models when seeking financing.

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