Which business credit score should you get?

Which business credit score should you get?

Paydex, a financial reporting system developed by Dun and Bradstreet (D&B), rates the payment habits of businesses with regard to other businesses, dealers, distributors and suppliers. These data are collected through banks and credit agencies and are used to create a dollar-weighted Paydex score. A higher Paydex score indicates that a business pays its bills on time; a lower Paydex score alerts potential merchants that a business is frequently late in making payments.

Within the business community, a high Paydex score is regarded not only as the mark of a conscientious company, but also an indicator of its financial health and sound management. Should a company have a low Paydex score, it will also have trouble making credit and supply agreements with other companies. Such a company may be required to pay for part or all of its order in advance. This can be a burden to the company and result in lost business opportunities.

The Paydex score system ranges from 1 to 100. A score of 80 means that the business pays its merchants on time. Any score below 80 means that a business has paid its merchants beyond the initial terms. For example, a Paydex score of 70 means that, on average, a business pays its merchants 15 days beyond the terms of the original repayment agreement. Alternately, any score above 80 means that a business has paid its merchants before the initial terms of the repayment agreement were up. For example, a business that has a Paydex score of 90 means that it generally pays its merchants 20 days sooner than terms.

Banks and other financial institutions also use a company's Paydex score when determining the credit worthiness of that particular business. If a company has a low Paydex score, it will have limited access to business credit. The business loan that is obtained will also probably carry a higher interest rate.

Because a good Paydex score is important for obtaining ample credit and a low interest rate, a business should be mindful of making timely payments to suppliers and merchants. If it is not possible to make a timely payment on an account, the company should contact the merchant in advance and make alternate payment plans.

If a company already has a low Paydex score, there are steps that can be taken to improve it. The company may make arrangements with its creditors and negotiate new payment terms. It may also obtain letters of reference from satisfied merchants and suppliers who are willing to provide positive testimony about the payment capacity of the company. These payment agreements and references can then be submitted to D&B for review and reevaluation of the company's Paydex score.