Failure Score

A failure score (D&B's Failure Score, formerly the Financial Stress Score, and Equifax's Business Failure Score are the best-known) estimates the probability of the terminal event: bankruptcy, voluntary closure with unpaid obligations, or going out of business within twelve months. It is built from payment deterioration patterns, public-record events (liens, judgments, suits), firmographic risk factors (age, size, industry failure rates), and inquiry velocity — a burst of credit-seeking is itself predictive.

Failure scores and delinquency scores answer different questions and should be read together. A customer can carry a decent delinquency score (pays reporting vendors adequately) and a poor failure score (small, young, in a high-failure industry, with a recent tax lien) — that combination describes a company that pays until the day it cannot. The inverse also occurs: an established company can be a chronically slow payer with little failure risk, which is a collections problem rather than a bad-debt problem, and the remedies differ.

Because base failure rates are low (low single digits annually in most segments), even a good model produces many false positives at aggressive cutoffs. Use failure scores to triage — which accounts get monitoring alerts, which trigger a manual review, which justify security or a reduced limit — rather than to auto-decline. The score's steepest value is in its worst decile: businesses in the bottom failure-score bands fail at many multiples of the base rate, and exposures there deserve genuinely different treatment.