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As a consumer, you may know the importance of building and maintaining a good personal credit score. What you don’t know is that businesses should do the same.
Although the business credit score is similar to the personal credit score, there are some key differences in how the score is combined. We’ll look at how a business credit score is built, the importance of high scores, and what you can do to make sure your business has a strong credit profile.
What is the effect of business credit?
When a consumer applies for a loan, the lender withdraws their credit score to determine if they are responsible. Business credit points work the same way. When a business owner wants to take out a loan or open a credit line, the lender or service provider checks both their personal and business credit results to determine their eligibility.
Any type of business can have a credit score for a corporation with thousands of employees. The only requirement is that there are suppliers, sellers, and creditors who regularly report the business activity to the Business Credit Bureau.
Why is a business credit point important?
Getting a good business loan makes business financing easier. If you can’t get business finance, you need to rely on personal savings, a personal credit card, a home equity, or other financial means. In addition, with a good business credit score, a lender or seller may not need personal insurance, which means you will not be able to pursue your personal property if you are not respected or paid.
Related: How to build business credit
How business loan results work
Business credit results are generated by four major business credit reporting agencies – Dunn and Bradstrat (D & B), Expert, Ecufax and FICO. To calculate your business credit score, you use information such as credit lines and payment history when your business starts.
The most common business credit scores range from 0 to 300, with the exception of FICO. Results in the 20% range are usually considered good. To maintain a strong credit score for your business, make sure you pay off all your debts on time or in advance.
How to calculate
While the basic calculation for private lending products such as FICO is public knowledge, lending agents producing commercial credit products are more confidential. Each agency has its own formula, and most do not provide accurate details about their algorithms.
However, for commercial credit reporting agencies, business credit is calculated taking into account company data, payment history, industry, credit use ratios, and overall financial performance. D&B, Experian and Equifax specifically collect payment data that sellers and lenders report.
How they were used
Like personal loans, business credit products represent the company’s financial performance and are therefore eligible for business. Vendors, lenders, and creditors use business credit to determine the risks involved. In addition, since anyone can see the business’s credit score, a prospective customer can check your score to determine on time.
Typical Types of Business Credit Outcomes
Five Common Business Credit Outcomes That Business Owners Should Know – D&B PAYDEX Outcome, Expert Intelicor, Ecufax Business Credit Risk and Business Outcome Outcomes and FICO Small Business Outcome Service (SBSS) Credit Outcome.
Here is how each of these results works.
Dunn and Bradstrat PAYDEX results
D&B PAYDEX scores range from 0 to 100, and 80 points are generally considered good.
Early or early payments will have a positive effect on your results, and late payments will have a negative impact. 31- to 90-day late payments will have a greater effect than 15- to 30-day late payments.
Use the graphic below to better understand the PAYDEX output regions.
To receive a D&B PAYDEX score, you must register a DUNS number on the website, allowing your suppliers and vendors to disclose your payment history to D&B. If you do not report your activity, you will not be able to build a PAYDEX credit score.
Expert offers two different versions of Intelliscore: Intelliscore Plus and Intelliscore Plus v2. Intelliscore Plus may include personal loan information in Intelliscore, especially if the business is relatively new. And, according to Experian, Intelliscore Plus v2 “allows you to speed up your credit decisions by accessing extensive business, collection, public records and signature information.
As shown below, both models range from 1 to 100 and have similar risk classifications.
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Ecufax Business Credit Results
Ecufax generates two business credit outcomes: the result of a business credit risk and the result of a business failure. Business Credit Risk Assessment assesses the possibility of 90 days of serious misconduct or payment; Business Outlook Predicts a business’s potential for bankruptcy over the next 12 months.
Both results reflect any losses, liabilities, judgments, current payment history and more. Also show your 12-month payment trend and compare that with the industry average.
Business credit risk ranges from 101 to 992, and business failures range from 1,000 to 1,610.
FICO SBSS loan results
Although FICO is not one of the main business credit reporting agencies, it does create one of the most common business credit results – FICO Small Business Credit Service (SBS) credit score. Lenders use this effect when applicants for SBA loans are eligible.
Results range from 0 to 300, but you will need at least 155 points to pass the SBA preview process. However, most lenders set their minimum score between 160 and 165.
Unlike other business credit products, the FICO SBSS credit score uses personal and business information to compile results. FICO includes personal loan information for business owners who own 20% or more, up to five people in total. FICO focuses on business finance information such as your gross income, number of employees, working years, other debts and more.
How to check the credit score of your business
Unlike personal credit scores, commercial credit scores are not usually free. You will need to purchase your products from D&B, Experian or Equifax or use a subscription-based business credit point website.
Checking your business credit results regularly can help you identify potential problems, such as late payment or identity theft. According to D&B data, business identity theft will increase by about 258% by 2020, so owners need to be vigilant.