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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.

business credit scoreA 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
As is the case with personal credit, it's always a good idea to apply for a loan or credit line before you actually need it. April Mason, author of the e-book "Building a Business Credit 101," suggests you start to build your Paydex score at least three to six months before you plan to apply for a loan. You can enroll in the CreditBuilder or ScoreBuilder programs offered by D&B, but that can cost several hundred dollars. The easiest and cheapest way is apply for a D-U-N-S number -- a nine-digit business identification number -- and use it to establish a small line of credit with a company that automatically reports to D&B. Many are office supply companies; they include Uline.com, NEBS.com and Viking.com.

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.

If a creditor does not report to D&B, avoid using that creditor if you are trying to build a Paydex score.

-- Albert Fury    
Business Credit Association of America    

"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
Having a high Paydex score both earns you better business loans terms and helps customers pay you faster. "The greatest thing for our small business was becoming a credit data supplier to D&B," says Doug Bates, chief business officer at Apredica, a medical contract research company. He describes a situation with a former client who owed the company $20,000, and reporting the delinquency to D&B actually helped the company get paid.

"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." 

Paydex scorePayment expectation
100 Expect payment may come early
90 Payments generally come within early payment discount period
80 Payment is prompt
70 Payment comes 15 days beyond terms
60 Payment comes 22 days beyond terms
50 Payment comes 30 days beyond terms
40 Payment comes 60 days beyond terms
30 Payment comes 90 days beyond terms
20 Payment comes 120 days beyond terms
UN Unavailable

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
Once you've established a Paydex account, it's important to keep it active. "Business credit is somewhat like personal credit, and most creditors want to see continuous activity," says Mason. She says that one mistake that business owners make once their business has a Paydex score is to stop using their business credit. "You can have a score of 80, but if there is no ongoing activity, your score will drop."

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

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