Every company has a Credit Score, in the UK and the US there are a number of Credit Agencies who calculate this and make it available, for a fee, to your potential customers, suppliers and banks. This can have a major impact on your business without you knowing anything about it.
The purpose of this post is to highlight the risks of not knowing how your credit score is calculated and to show how you can work with Credit Agencies if you feel that they have miscalculated your score or misinterpreted the information they hold on your company.
The purpose of this article is not to criticise Credit Agencies but to highlight to Companies the importance of making sure that your Credit Score is being correctly calculated.
The author has no financial relationship with any Credit Agencies and the purpose of this article is to inform company owners of the importance of understanding what records are held by Credit Agencies on their business and to provide some information as to what they can do about it by working with the Agencies concerned to ensure that this information is both correct and complete.
Credit Scores
Credit Agencies score your business out of 100 and this is a calculation of risk associated with trading with your company. The component parts of the score evaluate strength, performance and ultimately the creditworthiness of each company. The score is made up of over 50 factors including profitability, gearing and size along with other non financial items such as County Court Judgements, payment performance information, lateness of accounts, regional failure analysis and directors information.
What Does a typical Credit Score Mean?
The scores can be summarised as follows but do check with the Credit Agency you speak with to make sure you understand their scales.
- 91-100 = Very Low Risk
- 81-90 = Low Risk
- 51-80 = Below Average Risk
- 26-50 = Above Average Risk
- 16-25 = High Risk
- 2-15 = Maximum Risk
- =1 Intention to dissolve/winding up petition
- =0 Dissolved or serious adverse circumstances
Niches and Size
There are discrete score cards reflecting the age and relative size of a business. Primary segmentation breaks down into:
- Companies yet to file accounts
- Companies who have filed one set of accounts – with further niches
- Companies who have filed two or more sets of accounts – with further niches
Significant Potentially Adverse Factors
While each niche has its own characteristics, there are some significant common factors which could adversely affect a company’s score.
These include:
- County Court Judgements
- Number of Previous Searches
- Late filing of financial accounts
- Late filing of annual returns
- Trading Losses
- Deficit in Net Assets
- Low Equity Gearing
- Directors previous business failures
- Late settling of credit account invoices
Credit Agencies are explicit that they are open to discussion with companies of the outcomes of their credit scores and are prepared to review these where further information is made available to them. This process may involve a further fee.
Six Easy Ways to Improve Your Score
- File your Annual Return on Time
- File your Annual Accounts on Time
- Pay off County Court Judgements within 1 month
County Court Judgements are held on record for six years unless paid within one month. If you do pay it but outside of this time frame, obtain a Certificate of Satisfaction and Credit Agencies will include this in your record so that anyone who obtains a copy of your report can see that you have paid your debt.
- Pay your Creditors within their Terms, creating a positive payment trend
- Limit the amount of Credit searches made on your business
- Communicate with your Credit Agency
If your company has a low credit score, provide the Credit Agency with further trading information and they will normally provide a full Credit Review for an additional fee which includes some or all of:
- Review of signed Management/Draft or later Statutory Accounts
- Review of relevant business narratives
- Review of Business Plans
- Contacting three trade referees supplied by the subject company
- Analyse previous search information and remove duplicate searches.
Some of the Pit Falls
- Days beyond Terms
Much of the information provided to Credit Agencies comes from larger companies. Many smaller companies know well that when trading with larger companies, they are paid late. Small companies will normally try to settle invoices with similarly small and local trading suppliers in a timely manner but treat larger companies in the same way they are treated and pay later. As small companies rarely provide this type of data to Credit Agencies, small companies run the risk of losing points. There is no easy solution to this.
- County Court Judgements
It is difficult enough when you have a dispute with a supplier and it ends up in Court. If you lose, you may still have an option to negotiate the terms of a settlement which may be lower than the amount the judge awards against you. In any event, you are unlikely to be minded to pay promptly. From a credit score perspective, CCJs not paid within a month will remain on your record and affect your score for six years, although I understand that their impact reduces over time.
- Financials
Smaller companies are exempt from audit and need only supply limited financial information to Companies House, primarily some balance sheet information. This limits the amount of financial information Credit Agencies and other Credit Agencies can use for their financial evaluation. Larger companies who are fully audited, submit more detailed information, including profit and loss account information and therefore are easier to score and are more likely to benefit from higher scores (all things being equal and they being profitable) than a smaller company.
- Directors’ Histories
Credit Agencies is connects previous directorships held by the current directors to the score. This is not unreasonable. However, if you have voluntarily closed or dissolved companies in the past for reasons which may have been practical rather than financial, this can count against you. If you have such a track record, it is worth explaining to Credit Agencies the full details of the past companies and why they were closed.
- Lease Financing
If your company has leased a significant amount of assets make sure that Credit Agencies know that this is asset financing and not a current liability to be counted as debt. This can significantly adversely affect your acid test score, a measure of your liquidity and lead to lower scores
- Fund Raising
If you are seeking to raise capital, debt or equity, this may result in an increase in applications to Credit Agencies for a credit report on you. Without knowing that you have engaged in a process, Credit Agencies is likely to interpret this in a negative way with financial institutions and suppliers checking on your creditworthiness. In addition, if you frequently lease equipment, it is likely that the company from whom you are arranging the lease will apply for a credit report on you. It is important to ensure that Credit Agencies understands the normal course of your business and/or that you have started a fund raising process and can interpret these credit report requests corrrectly and fairly.
- Provide Additional Information: More information is better than less
Credit Agencies employ analysts to keep their reports up to date. The more helpful information that you can provide them with to ensure that they evaluate your company correctly the better. A few basic balance sheet numbers, absent any commentary or information on the business, can give a quite misleading picture of the health and creditworthiness of your company. Credit Agencies of course have to err on the side of caution but by working with them you can avoid many of the pitfalls I have highlighted above.
