Credit is a fundamental business tool that allows companies of all sizes to keep operations running smoothly, invest in expansion, and work with their partners and vendors. Access to credit is directly affected by business credit scores, and three agencies -- Dun & Bradstreet, Experian, and Equifax -- are responsible for most credit reporting.
Millions of companies rely on these bureaus’ credit scores to make critical business decisions, so it’s important to ask, how effective are they? Do traditional business credit scores accurately reflect a company’s financial strength and creditworthiness?
Unfortunately, too often, the answer is no. The data behind credit scoring can be plagued by errors. Sparse regulation of data reporting can mean incorrect, incomplete, and out-of-date information in a company’s file. This problem can hit new and small businesses especially hard because they frequently don’t have an established credit history or the resources required to build and regularly fact-check their credit record with each of the three bureaus.
What is a Business Credit Score and Why Does It Matter?
A business credit score is a way of evaluating how likely it is that a company will pay its financial obligations on time. A company’s credit score can determine whether they can get financing -- bank loans, cash advances, lines of credit, credit cards -- to enable vital expenditures for operations like payroll, equipment upgrades, and business expansion.
Without a good credit score, companies are more likely to be denied financing, provided lesser amounts than requested, and/or face more burdensome lending terms. In its 2019 Small Business Credit Survey, Fed Small Business, a collaboration between 12 Federal Reserve banks, found that only 47% of small employer businesses that applied for credit received all the financing that they requested. Among the 53% that did not, a low credit score was the most commonly cited reason for denial.
Beyond just traditional financing, business credit scores are used to facilitate and manage vendor relationships. A low credit score is a potential barrier to establishing vendor contracts and can result in stricter payment terms and timelines.
What Are the Major Business Credit Scores?
Dun & Bradstreet (D&B), Experian, and Equifax are the three bureaus whose business credit scores are the most widely used.
The Dun & Bradstreet PAYDEX score is a 1-100 rating based on a company’s payment history, with higher ratings going to companies that pay bills early. In addition to PAYDEX, D&B offers multiple other metrics to evaluate a company’s financial health as part of their business credit reports.
Experian’s Intelliscore Plus uses a 1-100 rating derived from the number and status of a company’s commercial accounts as well as how long they’ve had a file in Experian’s database. A financial stability risk rating is included with the credit score in Experian’s basic credit reports.
Equifax uses similar data as Experian to calculate a Business Credit Risk Score that ranges from 101 to 992. Their credit reports also include a Business Failure Score that predicts the likelihood that a company will file for bankruptcy in the next year.
Knowing the importance of these scores, most business owners want to find out how the three big agencies rate their credit risk. However, unlike with consumer credit, there are no regulations that require free access to these scores. Instead, companies must purchase one-time credit reports or pay for subscription access.
The Shortcomings of Traditional Business Credit Scores
The use of these three business credit scores is so commonplace that many people don’t stop to question how effectively they identify a company’s true credit risk. While traditional business credit reports contain valuable information, they suffer from several shortcomings.
- Incorrect information: Details of some business-to-business transactions, known as trade references, get reported to the credit agencies, but those reports can contain errors that become part of a company’s credit file. In a series of studies about consumer credit reporting, the Federal Trade Commission (FTC) found that as many as 20% of people have errors in their files. Given that consumer credit reporting is much more tightly regulated, the potential for inaccuracies in business credit files is significant.
- Incomplete data: The big credit agencies only receive trade references from a small list of companies, meaning that most B2B activity never gets recorded in their database. For small businesses, the result is often that their documented credit history appears far less robust than it actually is. While a company can submit additional trade references to improve their business credit score, this process can be costly and time-consuming.
- Out-of-date information: Fast-moving business environments can quickly render information obsolete, yet credit reports still draw on past data to determine real-time credit risk. The rapid change in the economic climate as a result of COVID-19 demonstrates just how easy it is for old data to fail to apply to present conditions.
- Limited records for young companies: Early-stage businesses frequently need financing but lack the types of trade references that are collected and valued by the credit bureaus. In addition, with fewer reports on file, erroneous data can have an outsized effect on their credit score.
If credit scoring isn’t based on high-quality data, it’s prone to miscalculation. In the past, with few other resources available to evaluate credit risk, using traditional credit scores made sense; after all, it was better than flying blind. But in a business environment marked by entrepreneurism, rapid change, and novel data analytics, the old credit scoring methods are of declining utility.
Modern business financing demands new approaches that can take advantage of powerful technology to collect and analyze data in a way that is both nuanced and predictive, providing a more meaningful credit score that is accessible to small businesses and empowers them to achieve their potential.