Business Credit Score

What Is a Business Credit Score?

A business credit score is a number that indicates whether a company is a good candidate to receive a loan or become a business customer. Credit scoring firms calculate business credit scores, also called commercial credit scores, based on a company’s credit obligations and repayment histories with lenders and suppliers; any legal filings such as tax liens, judgments, or bankruptcies; how long the company has operated; business type and size; and repayment performance relative to that of similar companies.

Breaking Down Business Credit Score

If a company wanted to take out a loan to purchase equipment, one factor the lender would consider is the business’s credit score. It would also look at the business’s revenue, profits, assets and liabilities, and the collateral value of the equipment it wanted to purchase with the loan proceeds. In the case of a small business, the lender might check both the business’s and owner’s credit scores, since the personal and business finances of small business owners are often closely intertwined.

The three major business credit scoring firms are Equifax, Experian, and Dun and Bradstreet, and each uses a slightly different scoring method. Unlike consumer credit scores that follow a standard scoring algorithm and range from 300 to 850, business credit scores generally range from 0 to 100. Regardless of the specific method used, a business will have a good credit score if it pays its bills on time, stays out of legal trouble, and doesn’t incur too much debt.

Business Credit Score in Action

What if Company A was considering taking on Company B as a client and wanted to know the likelihood that Company B would pay its invoices in full and on time? No business wants to do hours and hours of work for a client, then not get paid. Company A could check Company B’s business credit score first, then agree to do business only if Company B’s credit score showed that it had a strong history of paying its suppliers. Company A could even purchase a subscription service to monitor Company B’s credit score on an ongoing basis. If the score dropped significantly, Company A could lower its risk by discontinuing business with Company B or requiring payment in advance.

Similarly, Company C, a wholesale supplier, might want to check the business credit score of Company D, a manufacturer, before shipping out a truckload of goods with an invoice granting Company D 30 days to pay. If Company D has a high credit score, this arrangement would seem low-risk, but if it has a low credit score, Company C may want to ask for payment up front, before shipping any goods.