DEFINITION of 'Business Credit Score'

A number indicating whether a company is a good candidate to lend money to or do business with. Business credit scores, also called commercial credit scores, are based on a company’s credit obligations and repayment histories with lenders and suppliers; any legal filings such as tax liens, judgments or bankruptcies; how long the company has operated; business type and size; and repayment performance relative to that of similar companies. The three major business credit scoring firms are Equifax, Experian and Dun and Bradstreet, and each uses a slightly different scoring method. Regardless of the specific method used, a business will have a good credit score if it pays its bills on time, stays out of legal trouble and doesn’t incur too much debt.

BREAKING DOWN 'Business Credit Score'

If a company wanted to take out a loan to purchase equipment, one factor the lender would consider is the business’s credit score. It would also look at the business’s revenue, profits, assets and liabilities, and the collateral value of the equipment it wanted to purchase with the loan proceeds. In the case of a small business, the lender might check both the business’s and owner’s credit scores, since the personal and business finances of small business owners are often closely intertwined.

What if Company A was considering taking on Company B as a client and wanted to know the likelihood that Company B would pay its invoices in full and on time? No business wants to do hours and hours of work for a client, then not get paid. Company A could check Company B’s business credit score first, then agree to do business only if Company B’s credit score showed that it had a strong history of paying its suppliers. Company A could even purchase a subscription service to monitor Company B’s credit score on an ongoing basis. If the score dropped significantly, Company A could lower its risk by discontinuing business with Company B or requiring payment in advance.

Similarly, Company C, a wholesale supplier, might want to check the business credit score of Company D, a manufacturer, before shipping out a truckload of goods with an invoice granting Company D 30 days to pay. If Company D has a high credit score, this arrangement would seem low-risk, but if it has a low credit score, Company C may want to ask for payment up front, before shipping any goods.

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