If you regularly extend credit to businesses, you should familiarize yourself with a type of credit score that is similar to a consumer’s FICO® score but is used to determine if a company is a good credit risk: the commercial credit score, otherwise known as the business credit score. Here are four reasons why you should be using them:
- More accurately predict the possibility of late payments. A commercial credit score utilizes a business’ credit history to calculate a score that is representative of its credit risk. It is designed to help anyone who extends credit to a business determine the likelihood of that business to make late payments. Put another way, the number indicates whether a business might become delinquent. In practice, it is very similar to how a consumer score is used to assess a borrower’s creditworthiness, except it is specifically for businesses.
- Business scores foster better business relationships. Today, banks are the most frequent users of business credit scores. However, more and more companies are using this tool to decide whether to do business with a firm and on what terms. Commercial scores are important not only for financial firms such as lenders, credit card companies, and leasing and insurance firms, but also for non-financial firms that exchange goods or services that permit time to pass before payments are due. These types of companies include, but are not limited to, manufacturers, wholesalers and business-to-business services firms.
- Good habits = good scores = good credit risks. Good commercial scores are mainly influenced by consistent, prompt payments. Other contributing factors include established trade relationships and well-managed utilization rates. Businesses that keep their payments current, debt down and revenues growing generally have excellent commercial scores and that should bring peace of mind to any creditor using these scores as a tool to assess risk.
- Consumer scores may be combined with business scores. To get an even more precise picture of a business’ financial situation, you can obtain scores that combine business credit data with consumer credit information on the business owner which can sometimes have a significant impact on the overall score and result in a very different credit risk determination.
Xactus offers a variety of business credit scoring tools and reports that can help companies make sound credit decisions. For more information, contact your Xactus strategic account manager.