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Business credit scores: What they are, how to boost yours
Your business has a credit score, too
By Lisa Rogak
Just as a credit card company will look at your credit score before issuing you a card, business lenders rely on a similar credit scoring system to determine your ability to borrow money for your business.
A number of business credit reporting agencies have entered the market in the last decade, and new ones continue to pop up, but Paydex from Dun & Bradstreet remains the primary source for business credit scores.
Individual credit scores and Paydex are similar in that both are used to determine whether you get a loan and on what terms. The big difference is that while individual scores take a number of factors into consideration, the Paydex formula looks at only one thing: whether a business makes payments on time and meets creditors' payment terms. That's it.
A Paydex score can range from 0 to 100, with 80 and above "golden." Businesses with a score of 80 meet creditors' terms -- that is, they pay on time. Anything above that means they pay bills before they arrive or during the early payment discount period. A business credit score of 70 means you're paying your bill 15 days late; with a score of 50 you're 30 days late. (See Paydex payment score chart.)
How to establish a Paydex score
After you've placed several small orders with your personal credit card to establish a record, use your D-U-N-S number to apply for a business line of credit with them.
Establishing a business line of credit is different than the procedure for a business credit card. The application process for a business credit card generally requires owners to pledge their personal assets, so obtaining a card requires owners to have good individual credit.
Of course, you can build your business credit without Paydex by listing your current creditors as "credit references" who can then be contacted by a potential creditor, but it takes a lot longer since it's not automated. Lenders and experts frown on the approach.
"A high Paydex score means a lower business risk," says Stu Lustman of Southern Lending Solutions, a business loan broker. "Business loans can happen without a Paydex, but the business will have to have been around for a long time."
Albert Fury of the Business Credit Association of America goes one step further. "If a creditor does not report to D&B, avoid using that creditor if you are trying to build a Paydex score," he says.
Helping with accounts receivable
"We worked with the client, a well-funded startup, to no avail," said Bates. "It wasn't that they couldn't pay. The problem was due to a newly hired administrator who was trying to prove his value to his employer by screwing the company's suppliers."
Bates started supplying data about the company's receivables to D&B, including a report about the lack of payment. "When the CEO of the company learned that the administrator trashed the company's credit rating, he stepped in, apologized, and promptly paid the bill," he said.
Maintaining a good Paydex score
To further complicate matters, even though your Paydex score is stellar, that doesn"t mean you should let your personal credit slide, since a business lender will often pull a personal credit report on an owner or authorized officer at the company before approving a loan.
However, credit scores for individuals and Paydex do share one thing in common: "Creditors can be sloppy about how they report things, so it is wise to be vigilant and monitor your credit regularly and challenge any errors," says Fury.
Updated: April 15, 2009