Understanding Business Credit Scores and Ratings
It seems everyone working on their business credit report tend to focus on D&B's Paydex score as being the most significant factor, but there are actually six other scores that can have an even higher influence on being able to the approvals they want and need for their company. If you've ever wondered what those scores are, what they mean, or how they can impact your company's creditworthiness and credit approvals, you're going to want to read this blog post.
The Paydex score is dollar-weighted, placing a larger value on higher payments. Companies with high positive payments can still be negatively impacted if they have multiple slow payments, even if those slow payments are of a lower dollar value. Recent outstanding debt weighs heavier than older debt, and collections or bad debts significantly impact this and other credit scores. Ranging from 0 to 100, an 80 Paydex score is considered "optimum" because it indicates a company pays its bills on-time. Businesses who pay their creditors using discounted (anticipatory) terms (such as 2%10Net30) can often achieve a Paydex score above 80.
There are 75 factors that impact the Delinquency Predictor Score. By looking at the pie chart, you'll notice that some pieces are larger than others, indicating that some factors (such as on-time payments, employee count and legal structure) will impact this score more than others (such as how long you have been in business, how many locations you have and whether your payment history comes in from auto-reporters.) While much of the data impacting the various pie slices are things you can't impact, such as your company's age or industry, inaccuracies will often carry more weight than they should, such as having the wrong start date or industry (SIC code).
The same 75 factors that impact the Delinquency Predictor Score are also related to the Financial Stress score. If you look at the pie chart, however, you'll notice that the size of the pie slices are larger or smaller than they were for the Delinquency Predictor Score. Each slice is going to carry more or less weight on this score than on the others. That's because the factors that most heavily influence this score are things like your company's age, legal structure, location, principals, public filings, etc. These are all factors that you can impact, but only by making sure the information about your company is reflecting correctly in your business credit report.
The 75 factors that generate the Financial Stress score are the basis for the Supplier Evaluation Risk Rating. In the chart, you'll notice that all of the "slices" are the exact same size. That's because no one single factor impacts this score more than any other. If you view the risk colors like a traffic light, you'll see that the score ranges from 1 to 9, with 1 being green (lowest risk to potential creditors) and 9 being red (highest risk to potential creditors). This score can fluctuate from day-to-day, week-to-week, or not at all, depending on how your vendors and creditors report to the bureaus. I've also included a 0 because the absence of a rating can oftentimes be a critical difference in being able to achieve credit. For creditors who use this score to determine credit approvals, the absence of a rating is a significant sign.
The D&B Rating classifies a business according to verified company details. It can be based on the employee count or, if financial statements are submitted, a company's overall financial strength.
NQ - Not Quoted designation if D&B cannot verify the company's operations.
DS - Duns Support, indicates there's not enough data to rate the business.
ER1-ER8 or ERN - A business rated solely on its employee count.
--Â - A "dash-dash" rating indicates that a company's credit profile is valid but incomplete, missing key pieces of data.
1R2/1R3/1R4 - 10+ employees and credit appraisal of: 2=good, 3=fair or 4=poor.
2R2/2R3/2R4 - 9 or fewer employees and credit appraisal of: 2=good, 3=fair or 4=poor.
5A to HH - A company provides financial statements to verify their financial strength. Rated from 5A for $50m+ down to HH for $4,999 or less with credit appraisal of: 1=high, 2=good, 3=fair and 4=poor.
Many lenders and creditors who rely on analytical data are looking to the D&B Viability Rating when determining creditworthiness. This rating is broken down into four easy-to-understand categories: Viability Score, Portfolio Comparison, Data Depth Indicator, and Company Profile. Based upon many of the same factors mentioned earlier, the data that impacts this score revolves around a company's operations. The more data and payment history a company provides, the better the score will be. There are two numbers and two letters, and the lower they are the more reliable the data. This score can fluctuate significantly depending on monthly payment reporting.
Credit Limit Recommendations are based upon three of the most basic factors:
60% - Industry
25% - Business size
15% - Past performance
Your industry carries the most weight, which is why it is so crucial that the SIC codes that represent your business are correct. Your employee count, branch locations and projected or annual sales determine your company's size. Past performance indicates how much credit you have safely managed in the past, as well as how many of your creditors have reported negatively in the past.
The information provided above by Starpoint Credit Solutions has been gleaned from over a decade's training and experience helping small business owners better understand their business credit scores and ratings so they can build a solid financial foundation and achieve credit approvals.
The descriptions used are those of the author only, are for educational purposes only, and closely mirror the verbiage used when assisting small business owners on a day-to-day basis, whether they are clients or not. The terminology is broken down into common lay terms for ease of understanding and are not intended to be representative of information D&B provides to their clients or customers.
For more technical descriptions, you should research the Glossary page on D&B's website.
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