If you are new to the business world, it may surprise you to hear that business credit is fully separate from personal credit. Business credit reports generate from different criteria than personal ones and are used in different ways.
If you are a sole proprietor, you are your business, and they link your personal credit history to your business’. However, LLCs and corporations are separate legal entities. When an LLC borrows money, the lender looks at the LLC’s credit report, not the owner’s (unless it lacks sufficient history).
Many vendors and lenders choose to only work with companies that have established business credit. For example, to open a store credit line with Amazon, you need a business credit report with at least three trade lines.
In contrast to personal credit reports, anyone can purchase business credit reports. Prospective suppliers, leasing agents, customers, and lenders can all look at your business’ credit report to judge whether they want to work with you.
Businesses that survive are the ones that manage risk and taking on a new contractor or vendor is a risk. Your business credit report contains information on the likelihood that your business would close in the next 12 months. Even if you aren’t borrowing money, a supplier may see a negative item on your credit report and decide not to work with you.
When people talk about business credit scores, they are mostly talking about payment-history scores are on a scale from 0 to 100 with 100 being the best score. D&B’s PAYDEX score, Experian’s Intelliscore PlusSM, and Equifax’s Payment Index all range from 0 to 100 and give the most weight to payment history. Besides these scores, there are also scores that rate the amount of financial stress a business has or the likelihood of delinquency. Let’s start with D&B first.
D&B maintains detailed credit reports on businesses and uses multiple scoring systems. These include PAYDEX, the Delinquency Predictor Score (DPS), the Financial Stress Score (FSS), and the Supplier Evaluation Risk rating (SER). Some vendors or lenders may look at your PAYDEX score only, while others may take your whole report into consideration. D&B only creates credit reports for businesses and it views them as the standard for business credit in the industry. They report information on hundreds of millions of businesses.
The PAYDEX is a dollar-weighted score that relies on payment history reported to D&B. They gather data from vendors who report to D&B on your behalf and financial information that you can report yourself. The only thing that matters for your PAYDEX score is how your business pays its lenders and vendors. Being dollar-weighted, the score gives more weight to vendors with whom you do more business with. That also means being late on a large payment does more damage than being late on a small one (not that you should be late at all).
The Delinquency Predictor Score (DPS) is self-explanatory. It is a numeric value that corresponds to the likelihood that your business would close within 12 months. The DPS also predicts the chance your business would exhibit signs of serious delinquency like asking for legal relief from creditors.
The DPS ranges from 101 to 670, with a higher score corresponding to a healthier business. Your D&B business credit report will also translate the DPS into a percentile (1-100) and a risk class from 1 to 5. What’s confusing is a higher percentile is healthy while a lower risk class is also healthy. D&B mentions that businesses who don’t share any of their financial information with them can only have a risk class of
Another score on a D&B business credit report is the Financial Stress Score (FSS). Your FSS predicts the possibility of your business experiencing financial stress within the next 12 months. This score ranges from 1001 to 1875 and is expressed as a percentile and a risk class.
Experian’s business credit score is based on another 1-100 scale with 100 being the best. This score is like PAYDEX, but it has some differences. First, you can’t submit your own information to influence your Experian score as you can with PAYDEX. Experian gathers information from over 800 data points including vendors, public information, and other commercial or consumer sources. Even though the Intelliscore PlusSM takes more information into account, it still gives a lot of weight to payment history.
Equifax maintains its own Payment Index score and delinquency and failure probability scores. The Payment Index is like PAYDEX and Intelliscore, and it’s also in the same 1-100 range. As the name suggests, payments are the most important factor in this score. Their delinquency and failure scores are also similar to the scores that D&B creates.
The main takeaway from looking at business score calculations is that your payment history is important. Inquiries, the mix of credit, debt-to-income ratios, and other factors can come into play in certain situations, but most business credit reports don’t take them into consideration.
Even though each business credit report has multiple scores, payment history is the basis for all of them. If you think about it, it would be unlikely for a business to have a bad delinquency score while maintaining a high PAYDEX score. In the same way, a low PAYDEX score will signal to D&B that something is going on, and it may be hard to have a good delinquency score.
Building new business credit is like building new personal credit, but it can be simpler. Here are a few basic steps to build business credit:
To take advantage of the benefits of business credit, your business needs to be an LLC, corporation, or other separate entity. Lenders can take your personal credit into consideration if you are a sole proprietor. Also, this step should include registering a business address and phone number online and with 411 (lenders can double-check to make sure you really have a business number and deny you if you don’t).
Registering for a D-U-N-S Number is a simple process. You enter your business information online to get it and it’s free to do. A D-U-N-S number is required to build a business credit report on D&B.
Once you have a D-U-N-S Number, you can get vendor credit with certain vendors. In the beginning, you may only get net-15 or net-30 terms with low limits, but they can report these arrangements to your D&B credit report (make sure the vendor will report payments to D&B). Making on-time or early payments is crucial when you are just starting out.
Once you have a few vendors credit trade lines open, you can apply for store credit lines. For example, to get an Amazon store credit line, you need a business credit score and three trade lines.
Examples of revolving credit lines at this level can be business credit cards offered by American Express or Discover. To qualify for these, your business needs at least 10 lines of credit with a mix of vendor credit and store credit.
If you skip the first steps and apply for business credit cards, you’ll find that they may require you to personally guarantee the credit with your own assets. This is not an ideal situation, and you can avoid personal guarantees by building business credit.
As we mentioned, payment history is very important for business credit scores. In fact, you can raise your score by paying early. Personal credit reports don’t change whether you pay your credit card on the due date or two weeks before. However, paying vendors and debts early can significantly increase your business credit score.
Just making your payments on time will only get you to a score of 80 on D&B’s PAYDEX scale. You must make payments early to go beyond that. For business, that makes sense. If your business keeps all of its accounts current and even pays them early, other businesses will want to work with you. However, the opposite is also true. Late payments can significantly lower your score and remove any leverage you have to negotiate good payment terms.
One nice thing about business credit is that inquiries rarely matter that much. It would create a burden if business credit scores suffered from multiple inquiries. Think about it. It’s not uncommon for a new business to open up ten trade lines within the first two years. Spread-out, that’s at least five inquiries every six months. On a personal credit report, that kind of activity would be a red flag to lenders. But as long as the business is making payments on or ahead of time, each of those trade lines would add positive weight to the score.
Personal credit reports are available to consumers once per year for free. Law requires this so people can work on their scores and know what’s going on. With business credit reports, that’s not the case.
You can get your business credit report, but there will be fees. You can get your D&B score for the price of $61.99 on their website. Your Equifax business credit report will cost you $99.95, and your Experian report would cost you $39.95.
There may be times when you just want to check on your score, and certain companies may let you do that for free. Nav will give you a free summary of your business credit report which includes your credit score. This can be very handy, but just remember that it’s a summary of your report and not the full deal.
D&B provides a program called CreditSignal that will alert you of a change in your score. However, this service won’t let you just view your score unless you pay to subscribe (freemium models really seem to work these days). Beyond these two services, it’s hard to predict if more free credit score options will become available.
While a credit report is important for taking out business loans, companies don’t start out with one. In the beginning, startups have to fend for themselves. They may need $50k or more in starting capital just to open the doors and begin selling.
If you’re in this situation, you don’t have to turn to friends and family to finance your dream. Instead, you might open up a few lines of credit at your local bank to use for your business.
What you need is a decent personal credit score of 680 or above. You also need to have at least one revolving line of credit of $2000 or more which has been open for two years. Your credit utilization needs to be under 50%, and you need to have less than three inquiries in the past six months. If you meet these qualifications, you have a good chance of opening up a credit line to use for your business. And once you get one opened up, you may find that other banks look upon your application more favorably.
Business credit can seem confusing, so we hope this article helps to give you a better understanding of what it is and how to grow it.
MDW Credit Solutions offer business credit building for small-medium businesses. If you’re interested in leveraging our expertise to help your business gain access to high credit lines then please contact us today.