The credit score can serve as a barometer of financial desirability, with lenders willing to put funds to work in an individual borrower’s favor, for mortgages and credit cards and everything in between. The same metrics, and more, that go into a personal credit score and the summation in the form of that triple-digit number also can be extended to small businesses.
In data compiled by Nav.com across 15,500 smaller firms, several factors impact business credit scores, ranging from local tax and other policies to economic climate since the financial crisis hit nearly a decade ago. The range given to businesses stands at 0 to 100, and the threshold of 45 and above, according to Nav.com, is usually a hallmark of good credit risk for the small businesses that are responsible for driving as much as half of the nation’s gross domestic product.
The company’s findings show that, regionally speaking, northern states tend to have relatively better credit profiles. Eight of the top 10 states, such as Michigan (number 10), with, for example, a 45 rating, have higher rates as compared to the 675 personal credit score that comes in near the national average. Maine is next on the list, at number nine, with a 45.7 rating. Only one southern state, Alabama, was featured among the top 10 states, and policy measures here (that ranking comes from the Small Business and Entrepreneurship Council) were relatively favorable.
In an interview with PYMNTS, Levi King, Nav.com’s chief executive officer, said that many smaller entrepreneurs are unaware of their exact credit scores or how they impact the “desirability” they may display as credit risks for lenders. And when looking at B2B relationships, the business credit scores can alert a firm to the risk of working with or extending payments to another party. As he noted, a low credit score can give broad hints to that getting paid on time might be a difficulty.
A large firm, or a government agency, choosing partners in a supply chain or in procurement would find it useful to use the credit score to get a sense of issues that might have a ripple effect in term of getting goods on time. Such knowledge, the executive said, can “drive decisions such as requiring payments upfront,” avoiding such impact. This is especially important, he said, in industries with high turnover of products such as restaurants and retail establishments and where credit might be essential for leased equipment, in wholesale and medical verticals.
As far as the state-by-state indicators, per King, some states show a rebound in credit while personal credit has languished. One example is Nevada, where the business climate for taxes and regulations has been favorable for businesses, even as the ride has been bumpy for personal credit in the wake of the housing crisis and foreclosures (personal credit scores are among the worst in the country).