Personal Credit

If you are like most folks, you may have a pretty good idea about your personal credit score, or at the very least, you are well aware of how this score can affect your ability to borrow and the interest rates you will be offered. If you have bought a car recently, you will know from experience that the higher your score, the lower your interest rate.

Admittedly, there are many factors that affect personal credit scores and it is often difficult to determine exactly which of these factors has caused your score to change. And you probably already know that there are three credit reporting agencies, TransUnion, Experian and Equifax, which means that you have three different personal credit scores. You can find out each of these three scores by going to www.myfico.com. (Fico.com also posts daily updates on interest rates based upon your score. For example, using their chart, you can compare interest rates and monthly payments for mortgages and car loans. It is immediately clear that a FICO score of 720-850 can save you money, whereas a score of 500-589 means that you will be paying quite a bit more in interest. )

Another key point to remember about your personal credit information, including your credit scores, is that the government has passed many consumer protection laws which give you the legal right to challenge the accuracy of the information in your personal credit reports. Regrettably, this is not true with business credit reports. There is no similar protection from the government.

Business Credit

The same credit reporting agencies--TransUnion, Experian and Equifax--that compile personal credit scores and history are key players in business credit ratings. In addition, there is Dun & Bradstreet, which is arguably, the most important of them all. While most of the focus is on these four agencies, there are scores of other smaller ones who may be collecting and reporting data about your business credit, so do not make the mistake of assuming that only the four big companies are all that you need to consider. In fact, you may find it helpful to investigate some of these smaller agencies, especially those that are industry specific to the type of business you operate. For example, some business credit reporting agencies may focus on businesses that are connected to the auto industry. If that is your business, then these might be worth checking out.

Dun & Bradstreet

Here we will focus on Dun & Bradstreet, the premier business credit rating agency in the United States. Worldwide, Dun & Bradstreet has collected credit information on more than one hundred million companies, so it is no surprise that many creditors will ask for your D-U-N-S Number before processing your loan application. You can get this nine-digit identifying number for free by applying online at Dun & Bradstreet.

Of course, there is much more to building your credit profile than simply getting this number, but it is a starting point. Once you have your number, you can begin building your credit profile by establishing credit with those who will report your credit and bill payment history. Mistakenly, some business owners assume that all creditors automatically file reports with the credit reporting agencies such as Dun & Bradstreet. Not so. The trick is in knowing which do and which do not.

In addition to the D-U-N-S Number, Dun & Bradstreet has given us the commonly used PAYDEX score. Dun & Bradstreet defines PAYDEX as a “unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors.”

The PAYDEX Score ranges from 1 to 100. You can go to Dun & Bradstreet’s web site where you will find an interpretation of each score, but here are some highlights. The top PAYDEX score of 100 means that, on average, you have paid your bills 30 days sooner than specified in the terms and that your bill payment habit is what is referred to as “anticipate,” meaning that you don’t wait to get the bill from the vendor. You “anticipate” it and pay long before it is due. On the other end of the index, a score of 1 (actually, the same applies for scores 1 through 19) means that you have waited over four months to pay your bills and have gone 120 days beyond terms. Therefore, your bill payment habit is considered to be unavailable.

Most lenders prefer a PAYDEX score of 75 or greater. This score of 75 means that your average time to pay bills is eight days beyond terms.

While much of the focus seems to be on the PAYDEX score, this is only one measure of a business’s credit worthiness. Dun & Bradstreet also examines and reports upon a business’s financial strength and its financial stress.

Financial Strength

When measuring financial strength, Dunn & Bradstreet uses company size and net worth to assign ratings from 5A to HH, where 5A reflects a net worth in US dollars of more than $50,000,000. A company with an HH rating has a net worth of up to $4,999. Within this matrix, companies are additionally assigned a Composite Credit Appraisal, which is a number between 1 and 4, another measure of a business’s creditworthiness.

Dun & Bradstreet says, “Our creditworthiness assessment is based on both payments and financial stability.” The most desirable Composite Credit Appraisal rating is 1, which is considered high. A rating of 3 is good; 2 is fair and 1 is limited.

Financial Stress

Dun & Bradstreet reports that, based upon data from 2001, the national annual average percent of businesses that fail is 1.4%. (These days this rate of failure is significantly higher.) With this annual failure rate in mind, Dun & Bradstreet analyzes their accumulated data to derive a financial stress score that will indicate a business’s likelihood of failing. These financial stress scores range from 1001 to 1875. The higher the financial stress score, the less likely the business is to fail. (For more details, please refer to Dun & Bradstreet’s web site.)

So, It’s Complicated

As you can begin to see, business credit rating is far more complex than personal credit rating. With Dun & Bradstreet alone, the amount of information that can be accumulated and analyzed about your business is staggering, and you can probably see how easy it would be to get off track without the proper guidance from experts who understand how business credit works.

In addition to considering the above ratings and scores - PAYDEX, Financial Strength and Financial Risk, you also need to keep an eye on compliance. In fact, one common mistake made by business owners is to overlook this requirement. Instead, they will begin seeking business credit without first making sure they are in compliance. In the next chapter, we will take a detailed look at what it means to be in compliance along with some practical suggestions about how to make sure you don’t jeopardize compliance before you even get started building your business credit.