Pete Wild, Senior Lecturer in Accounting & Finance at Manchester Metropolitan University (MMU) Business School, advises how to prevent a poor credit rating getting in the way of your plans.
Truth is, the credit ratings of most SMEs are seriously flawed – but the even sadder truth is, those ratings play an important role in the funding of SMEs.
In the UK, the main credit reference agencies include Experian, Equifax, and Dun & Bradstreet. Your own bank may even have a credit-checking service, but essentially, they use the data collated by these main agencies.
Your customers may use them, your suppliers may use them, and your external funders will almost certainly use them, so how do agencies rate you, and how can you change what they think of your business?
1. Take control of your credit rating – deal with it now
I’ve worked with SMEs who’ve lost major sales opportunities or been crippled by cuts in supplier credit limits due to poor credit ratings. But equally, there’s those who’ve opened up new export markets or raised money with the help of well managed credit profiles. Credit rating isn’t rocket science or a dark art, but it’s something SMEs tend to ignore until it’s too late. It can take up to 60 days for any changes to hit your score, so don’t let your credit rating get in the way of your plans – deal with it now.
2. Check your financials at Companies House
Information filed at Companies House is important and very heavily relied upon by the credit ratings agencies. Look online at the information yourself and see just how hard it is to get an accurate and fair view of your company from what’s there. But that’s what the agencies use, unless you supply them with better information.
3. Check your own personal rating
Agencies will also check the personal credit rating of your company directors. Call Credit is the main agency for individuals and you can see how they rate you personally on Noddle. It’s free, and has pop-up boxes that allow you to amend the information held about you. Take care with directorships you may hold in other companies since your rating may be affected by those companies too.
4. Uncover and face up to any negatives
The Registry Trust gives the credit ratings agencies information about court proceedings such as County Court Judgements (CCJs). Usually you will know if somebody has served a CCJ, but not always. You can search the Register of Judgements, Orders and Fines to find out. With this knowledge you can then take the necessary remedial action of either disputing or settling the debt.
5. Be nice to your customers and suppliers and pay your phone and utility bills on time
Your customers and suppliers may provide extra information on you (particularly those that use the credit agencies themselves). Phone and utilities companies share information almost routinely, so take care with them – pay by direct debit and don’t stop payments, even if in dispute. Agencies also take note of your trade profile, so appearances in trade directories may help.
6. Understand the hidden factors that influence ratings
How long has your business traded? – the longer the better for a positive score. How many changes have been made? Too many name changes or too many year-end changes raises questions. Location is also important (Chelsea ranks better than Chorlton). The perceived risk of your business sector within the context of the overall economy is also a factor. Restaurants are a risky prospect at the best of times, but during a consumer spending squeeze – even riskier. While some of these factors might be beyond your control, you could compensate for potential penalties by taking other actions as outlined in this article.
7. Get your accounts to Companies House fast and in full
The fuller the accounts you file at Companies House and the quicker they’re filed, the better. Full accounts are by far the best, but accountants will file as little information as late as possible; it’s the way we are, but it’s not good for your rating.
8. Keep the communication flowing between year ends
Tell the Agencies what you’re up to and how things have gone since your last year end accounts. If you’re growing, then last year’s accounts won’t reflect how you’re doing, and neither will your rating. All agencies will take a call and have procedures for challenging and changing the information they have on you. Some even have “products” to help improve your rating.
9. Seek help from the credit rating agencies themselves
The ratings agencies, themselves, could help put you on the path to a better credit rating. Call their Credit Review service on 0844 4818 888 and check out a few of the offerings they have for SMEs. As an example, for £250 you can tap into an Experian service, which enables you to send them management accounts, business plans, details of new business, and up to three trade references (from tame referees!) and they’ll use this to completely review your rating. You can even join CreditPal and let them have online access to your management accounts to ensure the accounting information at the heart of their rating is up-to-date.
10. Get The Rating You Deserve
In summary, if the agencies have the wrong rating for your company, there’s plenty you can do to help yourself. Company ratings can differ between agencies, but check Experian as a minimum (some accountants do this for free), and check your own personal ratings. Tidy up any errors (they happen more often that they should) and sort black marks like CCJs. Above all, don’t neglect this critical task – failure to act could seriously hamper your future plans and company health.
Further information can be found at: www.mmucfe.co.uk