Do you know your business’s Dun and Bradstreet rating? You should. It affects the terms and conditions of relations with outside parties, and it determines the cost of any loans made to the business.
The information contained in a D&B report can make the difference between being awarded a contract or getting rejected. It pays to make sure the information in these reports about your company is correct.
Who Is Dun and Bradstreet?
Dun and Bradstreet is a company that maintains extensive commercial data and analytics on thousands of businesses. It offers products and services for risk analysis, marketing and research on global trends.
The most well-known service is the D&B rating for the creditworthiness of a company. If you’ve ever applied for a business loan, the prospective lender has more than likely requested a Dun and Bradstreet report on your company.
What Is a Dun and Bradstreet Rating?
A D&B report is an overall evaluation of the financial strength and creditworthiness of a company. This report is based on information in the company’s financial statements that have been furnished to Dun and Bradstreet. It has data about a business’s payment history, comparison of a company’s standing within the industry and an evaluation of the company’s financial stability.
Dun and Bradstreet uses this financial information to produce a rating. These ratings are divided into two parts: a Rating Classification and the Composite Credit Appraisal.
Businesses that have supplied current financial statements to Dun and Bradstreet are assigned a Rating Classification. D&B does not assign a rating to companies that have not provided financial statements.
A Rating Classification indicates the financial strength of a company based on its net worth or equity position. It is a combination of letters and numbers. At the high end, a 5A rating indicates a company with a net worth over $50 million, while an HH rating at the low end represents a company with a net worth less than $5,000.
The Composite Credit Appraisal is a number representing a company’s overall creditworthiness. This score is based on a company’s payment history, years in business, public records, number of employees and financial information. It ranges from 1 to 4.
The most creditworthy businesses have a score of 1. A company that does not give financial information to D&B cannot have a score higher than 2.
As an example, suppose a company has a D&B rating of 2A 3. The 2A part of the rating means that the company has a net worth of $2.5 million to $12 million. A 3 rating signifies that transactions with the company pose a greater than average risk and parties should go ahead but watch closely.
What Is a PAYDEX Score?
In addition to a D&B rating, Dun and Bradstreet produces a PAYDEX score that rates the creditworthiness of a business.
A PAYDEX score rates the probability that a business will pay its suppliers and vendors on time. It ranges from 0 to 100; higher numbers indicate a record of making payments on time or even sooner than the stated terms.
PAYDEX scores have three risk categories: 0 to 49 represents a high risk of late payments, 50 to 79 is a moderate risk and 80 to 100 is a low risk. A score of 80 means that the business pays all of its bills on time; a score of 70 is generally acceptable.
Higher scores show that the company is making payments ahead of due dates. A 90 PAYDEX score means that a company pays its bills 20-days sooner than the terms of the invoice, and a 50 score indicates that a company typically pays 30-days past due dates.
What Are the Delinquency Predictor and Financial Stress Scores?
The Delinquency Predictor assesses the likelihood that a business will fall behind on its payments or declare bankruptcy in the next 12 months. The score ranges from 1 to 5; 1 is the best score, while a score of 5 means a high probability of default. It is based on a company’s reported payment history from suppliers, demographic information and a search for any liens or lawsuits against the business.
Companies with good Delinquency Predictor scores are more likely to receive higher credit limits from vendors.
The Financial Stress Score measures the likelihood that a business will experience severe “stress” or “failure” within the next 12 months. It is similar to the Delinquency Predictor, but the relevant factors are weighted differently. The Financial Stress Score is used to warn creditors about possible upcoming extreme situations.
A business with a poor Financial Stress rating is likely to cease operations, default on obligations to creditors and undergo management changes.
What Is the Supplier Evaluation Risk Rating?
While D&B reports are most often used when applying for credit, they are also used to evaluate suppliers. When you’re managing a business, you want to know that your suppliers will be able to fulfill your purchase orders steadily and on time. The Supplier Risk Rating looks at the same factors as the Delinquency Predictor and Financial Stress scores but with different weights.
A business with a high Supplier Evaluation is in a better position to receive commitments for long-term contracts. Companies prefer to avoid suppliers with a low rating because they could go out of business and can cause severe disruptions in a company’s supply chain.
How Does Dun and Bradstreet Generate Your Rating and Scores?
Dun and Bradstreet produces its various ratings, scores and reports for a business based on public records, payment histories reported by creditors and the information that the company submits to D&B.
If you’ve ever made a late payment to a creditor or lender, it’s likely this information was reported to Dun and Bradstreet and is part of your company’s credit report.
D&B uses statistical analysis, comparisons to industry standards, demographics and other data to make projections about the future performance of a business.
Why Do These Ratings Matter?
D&B ratings matter because other companies may be using them to make decisions about doing business with your company. The information contained in these credit reports could help close a deal or doom it to failure.
D&B reports are not only used by banks or lenders; they have other applications. Some examples for using Dun and Bradstreet reports are as follows:
- Negotiating or renewing a lease
- Bidding on contracts
- Negotiating payment terms with suppliers
- Analyzing investments in other companies
Consider a typical business practice of extending net 30-day payment terms to customers. With 30-day terms, a business can get float for working capital to finance its inventory and customer receivables. Supplier credit could eliminate the need for resorting to invoice factoring to finance operations.
Companies with good Dun and Bradstreet ratings can receive vendor financing while those with bad credit scores may have to make upfront payments to purchase supplies. Running a business is easier, and other companies are happy to work with you when you have a good D&B rating.
How Do You Find/Obtain a D&B Rating?
The first step in getting a D&B rating is to apply for a D-U-N-S Number. It’s free.
After receiving a D-U-N-S Number, business owners can check their D&B rating and PAYDEX score by signing up with D&B for their CreditSignal service. This is a free service that notifies business owners of changes in their credit rating and scores and when another party has purchased a full copy of the report. However, D&B charges a fee to provide a complete credit report that contains all the information in their files.
Dun and Bradstreet reports are universally used and relied upon by lenders, creditors and suppliers when negotiating terms and making decisions. A favorable D&B score can provide a company with working capital, result in lower interest cost on loans, open doors to attracting larger customers and winning more contracts. It pays to watch your company’s D&B file and make sure it is up-to-date and correct.