An organization’s business credit file is a collection of scores and ratings that allude to an organization’s ability to make good on contractual obligations. These scores and ratings, which are outlined below, can help a business in numerous ways: a business can use these metrics when deciding to contract with a supplier, a bank can use the information in a credit report when deciding to offer a loan, and business owners can use the scores themselves in an attempt to improve their credibility. Whether you know what’s in your business credit file or not, it is important to understand that other businesses may be using the information to make critical decisions that could help or possibly hinder your business. Want to learn more about business credit in general, and not just about our scores and ratings? Check out our ultimate guide to business credit.
Here’s a breakdown of the scores and ratings in your D&B business credit file, and what they mean.
The D&B PAYDEX® score measures a business’ past payment performance. On a scale from 1 to 100, scores of 80 and above are considered “low risk,” and could potentially increase a business’ credibility to creditors.
A business’s PAYDEX® score is roughly equivalent to an individual’s FICO credit rating, and suppliers, banks, and customers will frequently request a PAYDEX® score and credit report from Dun & Bradstreet before doing engaging the services of a small business.
1 to 100: The Basics
Although the PAYDEX® system is similar to FICO, Dun & Bradstreet assigns scores on a scale 1 to 100, with 100 being the best possible PAYDEX® rating. Scores are divided into three Risk Categories, with 0-49 indicating a high risk of late payment, 50-79 indicating a moderate risk, and 80-100 indicating a low risk.
How You Can Influence and Improve a PAYDEX® Score
PAYDEX® reflects a business’s credit history and payment trends. The first, last, and most effective way to improve your business’s PAYDEX® score is to pay your bills on or ahead of time, and to make sure that your suppliers and lenders are reporting your payments to Dun & Bradstreet.
The D&B® Delinquency Predictor Scoreoffers insight into the likelihood of a business making a late payment, going bankrupt, or having future payment failures. On a scale of 1 to 5, a score of 1 on the D&B Delinquency Predictor suggests a low chance for delinquency, and a score of 5 suggests a high chance of delinquency.
TheD&B® Financial Stress Scorealso uses a 1 to 5 rating, similar to the D&B Delinquency Predictor Score, but pertains to the business’ likelihood of financial stress – like filing for bankruptcy – in a 12-month outlook.
The D&B® Supplier Evaluation Risk Ratingis crucial for suppliers and businesses interested in joining supply chains. The SER rating helps predict the chance a supplier will become inactive or shut down in the next 12 months. Since an inactive supplier could seriously disrupt a company’s supply chain and overall business, the SER rating can be an important part of a business credit report for companies doing research. On a scale from 1 to 9, a score of 1 indicates “low risk,” and a score of 9 indicates “high risk.” This rating can be especially important for suppliers interested in working with larger corporations because certain big-box companies such as Wal-Mart often require a low score.
AD&B® Credit Limit Recommendation is created by analyzing the size, industry, and payment history of a business. Banks and other creditors may use the credit limit recommendation to determine how much credit they will offer a business. A good recommendation could help a company get the loan it needs to run or grow its business.
TheD&B® Rating combines a company’s size and its balance sheet information (the company’s assets, liabilities and the owners’ equity), and uses it to create an overall rating for the business’ creditworthiness. This score can help viewers make sense of all the information in business credit report by giving an overall indication of a company’s credibility.
How Are Businesses Using Your Business Credit File?
Now that you know what scores and ratings are included in a D&B business credit file, it may benefit you to learn how other businesses are using that information. There are many different use cases for the information in your file, depending on what type of business you have. Here’s how companies may be using your business credit file if you’re a supplier, a manufacturer, or a construction business:
As mentioned above, the Supplier Evaluation Risk Rating can be especially important to suppliers. If you’re a supplier, or a business trying to break into a supply chain, other companies may be looking at this score specifically when they purchase your report. Since some large corporations require a low risk SER rating, this can be one of the main uses for your file. If you have a medium or high risk rating, you may find it more difficult to break into a supply chain or to work with certain large companies.
As a supplier, the information in your file could also be used to ascertain whether or not you make payments on time and forecast if you will continue to do so in the future. If you’re part of a supply chain, any late payments your business makes could affect the other companies in your chain, and those companies may be using your business credit file to anticipate any issues.
Manufacturers and suppliers are similar when it comes to the way businesses use the information in their business credit file. Just like with suppliers, businesses will want to know that the manufacturer they are researching will be able to deliver. Since manufacturers sell to other companies, and other companies may have to meet certain criteria (low SER ratings), manufacturers need to be able to show they can deliver to those companies per their contract, so that those companies can deliver to their customers. Since one business in the chain can affect all the others, its important that each company have strong scores and ratings.
There are several reasons a construction company may have other businesses purchase their D&B business credit file. A construction company not only has to pay its workers on time, it also has to work with credible vendors and meet hard deadlines. Businesses looking to hire a construction company may use the information in its business credit file to see if it pays its workers on time, if there is any financial stress within the company that may prevent it from meeting deadlines or even falling through on a contract. Having strong scores and ratings as a construction company could mean winning more bids and getting more business.
How You Can Use Other Businesses’ Credit
There are many different ways that you can leverage your own business credit, whether it’s to get a supplier contract or a loan, to get your product in stores, or to win a construction bid, but there are several ways you can leverage other company’s business credit as well, especially when it comes to your supply chain and your cash flow. Learn how you can judge a company’s credibility using business credit: