What are credit ratings and what can be done to influence them?
Unless you’ve been on the moon there is little chance you’ve missed the advertising by credit agencies telling us all as consumers how a credit score can be so, so beneficial to us all… they quite like them too as they make lots of cash when we forget to cancel our trial subscriptions!
What they don’t say is that the same applies to businesses, of all sizes, and for more reasons than is applicable to consumers. Unlike consumer data, the data about businesses is very variable, prone to error and often opaque. Each agency thinks they’re perfect but the reality is very different.
All this data is wrapped into a single score or rating and used by a multitude of service providers to make instant decisions about whether they will provide credit accounts, use us as a supplier, offer insurance or funding, allow property rentals or utility services without huge cash deposits.
The scoring process is closely guarded because of the apparent competitive advantage it brings. Take a look at this comparison of four scores on a massive global business operating all over the UK. All are based on a 1-100 range with 100 being perfection.
Agency 1 2 3 4
Score 100 41 98 12
Imagine if this was your business, with the random element being which of these four sources was being used by your suppliers? With one they’d be falling over themselves to offer services, with another it would be Pro-forma terms only and the explanation for the latter would simply be that their credit agency said you were a bad risk.
Now of course, you can go into battle with the amorphous credit agency if you can find out which one it is. But, there are some basics within your control which will make life easier.
Firstly, make sure any statutory filings such as accounts and annual returns are done promptly and take account of the delays at Companies House. If you don’t, some agencies remove their scores and credit limits immediately the documents are overdue – even if they’re in the process of being filed.
Secondly, if ever you’ve borrowed money supported by a charge over the business in favour of the lender, make sure the charge is officially removed once the arrangement is concluded. Even a cash deposit for, let’s say, a bond or letter of credit to be issued will be charged by the lender and registered accordingly. Don’t forget to remove it as soon as possible.
Thirdly, make sure any commercial disputes don’t result in a court claim against the business. Even insurance excesses, if unpaid, can be claimed in this way and severely damage a credit score.
Next – keep a careful eye on your suppliers’ statements of account and challenge anything which is said to be overdue compared to agreed terms. Even credits and offsets can be shown as aged debt and may be shared with credit agencies with an inadvertent negative effect on scores as a result.
There are many more factors to take into account depending on individual circumstances but there are actions that can be taken to manage this important area of commerce.