Understanding Credit Scores

Many entrepreneurs don’t know about or truly understand how business credit is established and tracked, and how it affects their lives and businesses. Understanding your business credit score is an important first step to successfully running and growing your business.

When a financial institution is evaluating a credit application from an individual, that person’s FICO score is a critical factor in the decision whether or not to approve the request. A FICO score is determined by calculating how much an individual has borrowed and how well he or she repays those loans.

However, when a financial institution is evaluating a credit application from a business or corporation, the evaluation of the credit history of that business is quite extensive. In addition to the amount of money a business borrows and how well it repays those loans, a potential lender may also factor in company size as determined by the total assets of the company and number of employees. Unlike personal credit rating where all of the agencies use the same formula to generate a standardized FICO score, there is no designated standard for determining business credit worthiness. Each business credit reporting agency has essentially developed its own evaluation system.

Experian

In order to create a thorough evaluation of the business’s financial strengths or weaknesses, Experian provides a comprehensive report that includes the total percentage of on time vs. late payments made by a company. Experian’s principal lines of business are credit services, marketing solutions, decision analytics and interactive services. The company collects information on people, businesses, motor vehicles and insurance. It also collects ‘lifestyle’ data from on and off-line surveys.

TransUnion

TransUnion has the most thorough employment data section in your personal summary. You can update or correct several fields, including: your current or previous employer’s name, the position you held and the date you were hired. Changing this information will not improve your credit score. However, if you ever seek a loan in the future, it will be helpful to have your information accurately reflected in your credit report to show a lender your hire date for a job, or the length of time you spent at a specific employer.

Equifax

Equifax uses their Small Business Credit Risk Score in order to predict the likelihood that a new or existing small business or corporation will experience significant delinquency or file bankruptcy in the next twelve months. This evaluation is based on a combination of a business’s financial transactions (including banking, leases, trade accounts, and public records), as well as the demographics of the business.

Dun & Bradstreet

D&B offers a variety of evaluation tools that can be used to determine a business’s credit strength or weakness. For many years, financial institutions have relied on D&B to help them determine whether to engage in business with a particular company, whether to extend credit to a company, and what kind of loan terms to offer. One of the features that is unique to a D&B business credit profile is the business credit report, the report is the analysis of that company’s financial strength. This is determined by computing a business’s total collective equity or net worth.

D&B Paydex

The PAYDEX score is D&B’s unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on up to 55 percent trade experiences reported to D&B by various vendors.  The D&B PAYDEX score ranges from 1 to 100, with higher scores indicating better payment performance.  A score of 75 is roughly equivalent to a FICO score in the low 700s.

To learn more about credit scores and to figure out your business credit score, please contact a Nevada Corporate Headquarters representative at 1-800-508-1729, Monday thru Friday,8 am-5 pm PST.