Guide to Business Credit Scores
Business credit scores can have a dramatic impact on the availability and cost of financing, and any impact is only magnified for commercial property financing where investors need to borrow large sums. For investors, developers and managers, understanding the role of a company’s financial score is essential.
What is a Business Credit Score?
The purpose of a business financial score is to help various parties assess the financial reliability of a company. Put negatively, a company’s business credit score represents the risk that the company will pay late, default or otherwise not meet financial obligations.
Knowing a business’s financial reliability/risk is helpful in multiple situations. Most obviously, lenders consider a company’s business credit score when approving and underwriting commercial loans. Partners, suppliers, landlords and others likewise consider business credit scores for various reasons.
Within commercial real estate, business credit scores are often used to assess tenant stability. Landlords may want tenants to have a minimum score so that the risk of nonpayment or vacancy (should a tenant go financially fail) is minimal. Landlords may also give preference to tenants that have higher scores, because they present less risk.
Of course, commercial real estate investors, developers and managers all must meet minimum credit score requirements in order to secure financing. Having a higher score sometimes qualifies investors for lower interest rates or more favorable terms.
Business Credit Score vs. Personal Credit Score
Most people are more familiar with personal credit scores than business ones. The two have both points of similarity and points of difference.
The way business credit scores are used to assess company financial risk is much like how personal credit scores are used to assess individual financial risk. Business credit scores are simply used for commercial purposes rather than personal ones.
One of the biggest differences between the two is the range that scores run. Personal scores can be anywhere from 350 to 800, whereas business credit scores go from 0 to 100. The scales work essentially the same despite having different ranges — a higher credit score is always better regardless of whether it’s personal or business.
(Sometimes owners of new businesses will use their personal credit score to guarantee a commercial loan for their new business, which might not yet have an established credit score. This is less often done within commercial real estate, however, because loans can be much larger than what individuals are able to guarantee.)
3 of the Major Business Credit Scores
All credit scores are calculated by private companies that specialize in the work. Lenders and other parties might pull a credit score from any company that provides them, but lenders generally stick to one of the major credit reporting agencies.
Three of the major company credit score reporting agencies are FICO, Experian and Dun & Bradstreet. Both agencies provide a score that ranges between 0 and 100, and this score is set within a larger context that provides additional details about a company’s financial state. (The FICO Liquid Credit Score is unique among company credit scores, for it ranges between 0 and 300.)
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D&B Paydex Score as an Example
The Dun & Bradstreet business credit scores and ratings are often favored by commercial lenders, for this agency specifically assesses business credit risk (and not so much personal risk). The D&B business credit score also demonstrates how the single credit score can be placed within a larger contact to gain more insight. The agency refers to its score as the Dun & Bradstreet Paydex Score.
The Paydex Score measures how well a business has met its past payment obligations, and this past performance can theoretically be used to estimate how well the business might meet payment obligations in the future.
The general Paydex Score can be considered alongside other scores from D&B. Other scores include the agency’s Delinquency Predicator Score (risk of late payment or failure of payment), Failure Score (risk of bankruptcy or other financial stress in the next 12 months) and Supplier Evaluation Risk Rating (risk of supplier pause or shutdown in next 12 months).
When considered altogether, the general Paydex Score and more specific scores give a fairly detailed picture of a business’s financial situation.
The specific scores that Experian and other agencies provide vary from this, but the concept of a general score combined with more specific ones is consistent across most agencies.
(Some of the other scores have different ranges, and a lower number is sometimes better than a higher one with these scores. The overall goal of assessing financial risk in some way remains the same, however.)
How Can You Check a Business Credit Score?
Any business or individual can check a business’s credit score, and they don’t need the business’s permission to do so. This is a significant difference from personal credit scores, to which access is greatly restricted.
Business owners and investors may want to check their own company’s business credit score for several reasons:
- Errors: Errors can occur despite an agency’s best efforts to provide accurate information. Periodically checking for errors can ensure that any which occur are quickly corrected.
- Fraud: Businesses can be victims of identity theft, as criminals may try to use a business’s credentials to secure loans or for other purposes. Many instances of fraud will be recorded on a business’s credit report simply because the fraud is usually financial in nature. Sometimes fraud is first noticed as an errant entry on a business’s credit report, and this might be noticed before there are any other signs of the malicious activity. When checking for fraud, businesses should look at their entire credit report rather than just their three-digit score.
- Financing: Investors who know their company’s business credit score have a better understanding of what loan programs their company might qualify for. They know what financing opportunities to pursue, and whether they must improve their company’s score before applying to a specific program. Some federal commercial real estate programs have strict business credit score requirements.If an issue arises when a company’s loan application during underwriting, knowing and understanding the company’s credit score can help business owners discuss the matter with the lender’s underwriter.
Standalone business credit scores can be requested from the agencies that calculate them. Experian, Dun & Bradstreet and others all offer free standalone credit scores. The agencies also provide ongoing services that allow businesses to monitor their credit score anytime they want.
Businesses that would like to check their credit score need only contact the appropriate agency and inquire. The steps required vary by agency, but they’re generally straightforward and simple.
What is a Good Business Credit Score?
There’s no one magic business credit score, for each lender sets its own credit score requirements. Sometimes minimum score requirements even vary across a single lender’s loan programs.
Nevertheless, the following are general ranges that lenders might consider good, fair and poor:
- Scores between 80 and 100 are usually considered low risk
- Scores between 50 and 59 are usually considered moderate risk
- Scores 49 and lower are usually considered high risk
Companies are unlikely to be approved for financing if their business credit score is less than 50, and those with a score above 80 can sometimes qualify for better loan terms. In between these extremes, companies often can get some financing but might face limitations.
How Can Companies Improve Their Business Credit Score?
Hundreds of variables can be considered when calculating business credit scores. Agencies frequently check collection information, public filings, new accounts, financial ratios and many other indicators. Updating a business’s information can sometimes result in an improved score.
The surest way to raise and maintain a business credit score is by simply paying bills on time, however. Paying bills shows reliability and stability, and can lower debt utilization ratios. It’s also ultimately what credit scores are used to estimate — whether a company will make future payments on time.
How Do Business Credit Scores Apply to Commercial Real Estate Investors?
Business credit scores directly affect commercial real estate investors’ access to financing. While this is broadly true for all investors and businesses, financing access is especially important in the high-leverage commercial real estate sector.
At a most basic level, business credit scores determine whether commercial real estate investors are able to qualify for loan programs. Both federal loan programs and lender-determined loan programs have minimum credit score requirements. Investors will be unable to secure financing through the various programs if they don’t have at least the minimum required credit score.
Qualification issues can prevent investors from accessing any financing in the most severe cases. In other situations, investors might not be able to take advantage of the most favorable programs.
At a more nuanced level, business credit scores can affect the interest rates that commercial real estate investors receive. Those with good (low risk) business credit scores sometimes receive slightly lower interest rates than those with poor (high risk) scores. Even variance among fair (moderate risk) scores can affect interest rates, and any difference in rate can have a profound impact when borrowing hundreds of thousands or millions.
Occasionally, lenders may require a personal guarantee if a company’s credit score is undetermined or low.