As reported by Entrepreneur.com, fewer than 10 percent of business owners fully understand how business credit scores are established. This is less a function of disinterest, and more a result of widespread misunderstandings and misinformation – including those spread by some unscrupulous “credit consultants” who sell their so-called services to individuals and businesses.
To help set the record straight, below we clarify how a credit score is created, and what it ultimately means when trying to access a business loan.
How Do Business Credit Scores Get Created?
A business credit score derives from multiple sources, including legal files, credit applications, supplier and vendor payment histories, collections information, and other background data.
Personal Credit Scores vs. Business Credit Scores
Personal credit scores are calculated by the three national credit bureaus (TransUnion, Experian and Equifax), and the number ranges from 300 and 850 – with about 700 being considered “good”.
Business credit scores, however, are calculated by various companies including Dun & Bradstreet, Experian Business, Equifax Business and Business Credit USA. Because these companies each use different algorithms and calculation methods, what one company deems as a good (or excellent) score will not necessarily translate to another. For example, Experian uses a scale of 0-100, with a breakdown as follows:
- 0-15 is considered high risk
- 16-30 is considered medium to high risk
- 31-80 is considered good credit
- 81-100 is considered excellent credit
Dun & Brandstreet’s PAYDEX also uses a scale of 1-100, but the ranking is based on whether a company has paid invoices on time within the last 2 years. As such:
- 0-49 is considered high risk
- 50-79 is considered medium risk
- 80-100 is considered low risk
Establishing Business Credit History
Many business owners who’ve been operating for years are shocked to discover that their credit history is not well-established. This is because, contrary to popular belief, creditors are not required to report payment behavior to the commercial (business) credit rating firms noted above. For this reason, wherever possible it’s advisable to work with creditors who will report on-time payments to these rating firms.
Business Credit Scores & Access to Capital
A variety of third parties – including banks, credit card issuers, insurance companies, leasing firms, investors, and so on – pull business credit scores to evaluate risk and reliability. For some of these third parties, the score will be one of several factors they consider. For others such as banks, it will be their primary factor.
This is why millions of businesses across the country CANNOT get a business loan from their bank. They either don’t have a long enough credit history (banks typically want two or more years of extensive history), or their scores aren’t high enough (anything less than “excellent” is considered risky).
How Mulligan Funding Assesses Business Credit Scores
At Mulligan Funding, we conduct a business credit check at the time of application, which is standard operating procedure. However, unlike banks, we do NOT interpret scores as the end-all-and-be-all of credit worthiness. We know that a business is much more than the sum total of its credit score. As such, we regularly approve loans for businesses with limited credit history (e.g. 2-3 months), and that have credit scores deemed “high risk” or “bad” by commercial rating firms.
Call Mulligan Funding at 855-326-3564 to discuss your financing options today!