How Do Corporate Credit Scores Work?
Just like private individuals, corporations and other businesses build credit histories based on the way they deal with their creditors. Specialized companies track these credit histories and rate businesses on them, just as they do with individuals. While a corporate credit score is similar to an individual score, there are some important distinctions.
How Corporate Credit Is Scored
Similar to scoring the credit histories of individuals, companies are rated as good or bad borrowers based on their track record with the credit they’ve used in the past. Because most of a business’s transactions are a matter of public record, it’s usually easier to establish a full financial picture of business’s behavior. This means that corporate credit scores tend to be more accurate. On the other hand, the way that businesses (especially small businesses and new ones) tend to rise and fall rapidly means that keeping corporate scores up to date is challenging. In general, there is much more open communication and negotiation between business entities and credit scorers than there is with individuals.
The Distinction Between Credit Scores And Credit Ratings
Some people fall afoul of the subtle distinction between credit scores and credit ratings. Ratings are an independent assessment of the risk presented by a business that sells debt instruments like stocks or bonds on an open market. Assigned by companies like Standard & Poors, credit ratings are mainly of interest to market investors. In contrast, credit scores are derived from a business’s payment history. These are typically important to vendors and other businesses considering contracting or partnering with the business in question. Unlike ratings, which are publicly announced, credit scores must be purchased by interested parties.
Although the three leading scoring agencies for consumer credit are also active in the corporate credit world, they are small fry compared to the industry leader, Dun and Bradstreet. D&B provides corporate credit scores and credit management services to companies of all sizes. Their position in the scoring industry is so vital that a good D&B record is a prerequisite for working with many major companies. Their proprietary “D-U-N-S Number” is often required to compete for major contracts or to secure favorable deals with large vendors. For smaller businesses, Experian has been aggressively expanding its corporate credit services, and it is beginning to play a similar role for interaction between small companies.
Why Do Corporate Credit Scores Matter?
While the Dun and Bradstreet credit history described above is an absolute necessity for large, well-established companies, smaller businesses and start-ups will find it extremely difficult to create a comparable credit background. The process can take more than four years, and involves considerable expense. The good news for small businesses is that corporate credit scores decrease in importance as the scale of business deals decreases. Local vendors and those that deal in small lots rarely check credit scores prior to a deal; they prefer to deal in good faith with new customers and then let their own experiences guide their credit decisions. Still, smaller businesses with an eye on expansion and long-term viability will behave responsibly with their credit.
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