What You Need to Know About Equifax's New Business-Scoring Model

By Brian O'Connell

The credit-scoring market is dynamic, changing its business model as sharper economic winds pick up. That's especially true in the business credit scoring sector, where entrepreneurs and startup owners are dealing with tough credit conditions, lower sales and less frequent trips to the bank to deposit checks. With things looking tougher for business owners, Equifax has just launched a new credit-scoring system that reflects the new realities in the small-business environment.

Business owners need to know all they can about credit scoring models. Your business credit score can determine:

• Loan amounts and interest rates.
• Business insurance premiums.
• Whether suppliers will extend credit.

Business-scoring models also help creditors figure out the potential risk of a small-business owner making late payments on extended credits and loans. Warren Beaty, Senior Vice President of commercial information solutions at Equifax, put it like this in an interview with CreditCards.com: "What's the likelihood of the business going severely delinquent?"

Banks and credit card companies aren't the only ones examining a business owner's credit score. Vendors, wholesalers and other business partners may want to take a look, too.

Three credit-scoring agencies dominate the business scoring market: Equifax, Experian and Dun & Bradstreet (with Paydex). Here's a snapshot of how each calculates a business credit score.

Equifax: Equifax emphasizes current payment status and the percentage of delinquencies in the past 12 months. The credit giant also examines the balance between credit used and credit available. In addition, Equifax factors in the age of the company, its business category and its number of employees.

Experian: Experian pretty much takes the same line as Equifax, although its actual scoring model is different. It ranks business's creditworthiness on a scale from 1 to 100, while Equifax ranges from 101 to 992. Experian is particularly interested in a business's credit utilization ratio: the amount of credit a company uses against its credit availability.

Paydex: Dun & Bradstreet's scoring model, Paydex, is fairly simple: The company focuses on a business's financial activity over the past 12 months, figuring that's enough of a timetable to establish credit risk. Like Experian, it uses a numerical rating service of between 1 and 100. The higher the business's score, the better its chances of getting credit. 80 or above is the ideal score for this model. It tells creditors that businesses pay bills exactly on time -- not before or after the due date, which vexes creditors.

Equifax's new model
Now Equifax is trying to further separate itself from the pack with a new business credit-scoring model that aims for a more "complete" view of how a business handles it credit and debt obligations.

Atlanta-based Equifax relies on data from the Small Business Financial Exchange, a nonprofit group of leading small-business lenders in the U.S. The new credit scoring system, run through Equifax's Commercial Information Solutions, offers several new features, including:

• Automated scoring systems that are built on pre-recession, recession and post-recession data.
• Models that incorporate twice as many data attributes as other industry scores, including large and small business, public and private organization and time series variables.
• A new, minimum scoring criterion to validate the legitimacy of a business and verify application data for potential fraud.
• Scorecards that can be applied automatically based on business size, eliminating the need for multiple systems and scores.

The Equifax software also includes a business delinquency score feature, which calculates the likelihood of "severely" late payments on business accounts, and a business delinquency financial score, which measures late payments on strictly financial accounts (like a loan from a bank). The business failure score model can predict the likelihood of a company failing in the next 12 months.

Equifax says the new scoring model reflects tough economic times and better protects lenders and companies from a toxic business environment. "Many customers tell us that access to information solutions that can translate data into improved performance is critical to managing risk and enhancing account profitability," noted Reza Barazesh, Senior Vice President at Equifax Commercial Information Solutions in a press release. "Leveraging new scoring criteria and world-class data assets, our new scoring solutions provide greater predictive power for making better, quicker credit decisions - regardless of economic developments."

Now that Equifax is out with a new business credit-scoring system, it won't be long till its competitors follow.

You might also like: 6 tips for securing your payment system; Chargeback troubles? Fight back with these key steps

Published: June 21, 2011