All three major credit bureaus, Experian, Equifax, and TransUnion, calculate credit scores using a model very similar to FICO.On the other hand, business credit scores don’t use the FICO scoring model. Instead, business credit scores are calculated using entirely different models. One hint about how different business vs. credit scores are is their number ranges. Business credit scores are often measured on a scale of one to 100, while FICO scores range from 300 to 850. Yet the numbers are just one of the critical differences between FICO and business credit scores. In the rest of this post, we’ll explain the many differences between these two essential types of credit scores. As a small business owner, it’s crucial to understand the differences between your business credit score and FICO score, especially if you plan to apply for additional financing.
What is a FICO Score?
According to FICO, the FICO score definition is “A three-digit number based on the information in your credit reports.” FICO scores were created in 1989 when Equifax, Experian, and TransUnion realized they needed an industry-standard credit score. These three companies hired Fair, Isaac, and Company to develop a consistent credit scoring algorithm. Today, each of the three top credit bureaus, Equifax, Experian, and TransUnion, provides FICO scores. Many lenders use your FICO score—or another similar scoring model—to determine the likelihood that you’ll repay your loan.
The Differences: Business Credit Score vs. FICO Score
Equifax, Experian, and TransUnion are the big three credit agencies that measure personal credit.Experian and Equifax are also two of the big three business credit agencies. Dun and Bradstreet is the third major business credit agency. Unlike the FICO score, there is no industry standard for business credit scores. Experian, Equifax, and Dun and Bradstreet have different ways of calculating and expressing your business creditworthiness.
Experian
Experian’s business credit score ranges from one to 100, with 100 being the lowest risk borrower. Experian calls this their Intelliscore PlusSM, and to determine this score, Experian considers your:
Credit utilization
Outstanding balance
Time in business
Number of trade experiences
Payment history
Demographics
Legal history, as shown by public records
To access your business credit score from Experian, you’ll need to sign up for their credit monitoring service or run a credit check on their website.
Equifax
Business credit reports from Equifax come with three different scores:Business Failure Score: This score ranges from 1000 to 1610, and it measures the likelihood that your business will stop operating within the next 12 months. The higher your score, the less likely your business is to fail. Equifax uses demographics, legal records, and payment history to determine this score.Payment Index: The payment index is Equifax’s equivalent to the business credit score. It ranges from one to 100, and like Experian’s business score, the higher, the better. Your payment index score depends on your payment history, so if you pay your bills on time, you can expect a score between 90 and 100.Business Credit Risk Score: This score ranges from 101 to 992, and again, higher is better. The business credit risk score helps lenders determine 1) how likely a business is to pay and 2) how likely the payment is to be on time.
Dun & Bradstreet
Dun & Bradstreet uses the PAYDEX Score to evaluate your credit. Their website states, “Your PAYDEX Score is roughly equivalent to an individual’s FICO credit rating.”The PAYDEX Score ranges from one to 100, with 100 being the best score. Zero to 49 indicates a high risk of late payment, 50 to 79 is moderate, and 80 to 100 indicates low risk. Your PAYDEX Score is primarily determined based on your payment history.
How Lenders Use Business Credit Scores vs. FICO Scores
The FICO credit score is a model that calculates the likelihood of a consumer defaulting based primarily on their payment history. Business credit scores are essentially the same, except they calculate the possibility of a business defaulting, not a consumer.For business lenders, business credit scores are generally a better way to measure the creditworthiness of a potential borrower. Because of this, you’ll find that many business loans require a business credit score.
Conclusion: Why Bother With Business Credit Scores?
As you may already know, a good FICO score helps you qualify for better terms on business credit cards, loans, and other types of financing; a good business credit score does the same thing. According to NerdWallet, you may also be eligible for lower insurance rates if your business credit score is strong.A good business credit score helps you save money and get more flexible business financing. Yet all it takes is a concerted effort to pay your bills on time and avoid legal entanglements, which is good business practice.
