So you’ve started your new hot business, that’s going to smash the competition and take over the world, but you need business credit to do so. Well, you’ll need to make sure your business credit score is good enough to qualify, easier said than done for new business.
What is Paydex?
There are several measures of a business’ creditworthiness, but the one most commonly used by banks for commercial lending is Dun & Bradstreet’s Paydex score.
It works a little like a FICO number for businesses, but instead of being a number out of 800, it is from 1-100, representing the likelihood of the business being able to pay its bills in the next 80 days.
Unlike FICO, which has several contributing factors, Paydex is calculated solely from payment activity. Pay your bills on time, or even early, and your score increases; pay them late and it falls.
Here’s D&B’s official definition:
“The PAYDEX® Score is D&B’s unique dollar-weighted numerical indicator of how a firm paid its bills over the past year, based on trade experiences reported to D&B by various vendors. The D&B PAYDEX Score ranges from 1 to 100, with higher scores indicating better payment performance.”
How is it calculated?
A score of 80 is given to any business deemed to pay its bills on time.
D&B then take all payments made by a business and produce an estimate of the number of days overdue a business is expected to be overdue with a payment (a minimum of 4 payment reports are required before D&B will estimate this).
This is halved and taken of the baseline 80 ‘on time’ score to produce the paydex for the business.
So, for example, a business which is expected by D&B to be 20 days overdue on its payments on average, would have a score of 70 (80 less half of 20).
Interpreting the Paydex
By working the above calculation the other way round, we can see what D&B believes a business’s payment performance to be.
If, for example, you are about to do business with a company with a paydex score of 60, you know that D&B expect that you’ll have to wait for you money 40 days after it is due (as 80 minus half of 40 is 60).
For this reason, banks and suppliers like to see a paydex score of 75+ (preferable above 80), meaning that on average a business pays its bills on time.
Improving your score
Now that we know how Paydex is calculated, we can work out how to improve it. Here are some ideas:
1. Pay bills on time
This is obvious, but often overlooked by cashflow aware businesses paying bills as late as possible for cashflow reasons.
2. Pay bills early
This is less obvious, but paying bills early helps your paydex score. Early payments are actually taken to be ‘negative’ overdue payments; ie they reduce the number of days your business is expected to pay their bills, and hence improve its paydex score.
3. Make sure all payments are recorded by D&B
Payments are only recorded by D&B if reported by the supplier. Whilst this is automatic for most large vendors, there is no guarantee. Hence important Paydex improving information may not be included in your score.
There are several options to a small business. The easiest, but costliest, is to pay for D&B Credibility to report payments on your behalf. For a monthly fee they will report payments on your behalf and allow you to more proactively manage your score.
4. Open lots of supplier accounts
This is particularly useful for new businesses who often struggle to obtain credit due to not having the required 4 payment reports with D&B to obtain a Paydex score.
For stationery suppliers such as Staples and Officemax will allow small credit accounts to be set up by new businesses. Set up these accounts, buy some stuff and pay the bill on time or, even better, early.
Knowing your Paydex store, understanding how it is calculated and then acting to improve it are vital for a new business, especially, if it wants to obtain credit.
Follow the above tips and you’ll be well on your way to taking over the world as planned…
About the Author: Chris Young is the owner of Epsilon Business Credit (http://www.epsilonbusinesscredit.com) a site devoted to small business funding. He has 20 years financial experience in the online and technology space, lately as a CFO, and hence has a particular interest in financing new technology and other start ups.
Contact: c.young [at] epsilonbusinesscredit.com