What will the Computer Say?
Trading conditions over the past couple of years have meant that many companies have had worse results than they would have liked. Balance sheets may be looking weaker and as a result, credit scores in many sectors are lower than they were.
The Bank of England is predicting many more months of difficult times as costs increase.
Credit scores are used by the external market to assess a business’ strength. They are becoming an increasingly important measure of a company’s likely future stability for businesses and lenders.
This may mean your potential suppliers, lenders and even customers could check your credit score before they decide if, and how, they wish to trade with your company.
The computer could simply say ‘no’.
The Link between Credit Scores and Cashflow
Many companies will set their terms, sometimes even including their unit prices, based on a customer’s credit score. The riskier that company appears, the less attractive your terms will be.
Similarly, banks and other lenders will set rates of interest based on their assessment of risk, quoting higher rates for what are seen as ‘riskier’ businesses.
Trade credit from your suppliers is effectively free cashflow. The more you can maximise this internal working capital, the less you will need to borrow from external sources.
If you do need to borrow to fund your business and growth, lower rates of interest will help your profitability alongside your day-to-day cashflow.
How are Credit Scores Set?
There are several credit reference agencies in the UK who all calculate their scores slightly differently, based on their own data intelligence and research.
However, all are likely to consider many similar factors around your financial results and credit behaviour.
The agencies will obtain details of your company and your financial results which you file at Companies House. They will also receive information directly from banks, lenders and major companies to track your bank and credit balances and payment performance.
There is a wealth of data in the public domain for your business. Do you know what that looks like for your company?
Tips to Improve your Credit Score
Here are three areas you can control which will have a direct link to your business credit score:
1. Filing accounts
There is a trend amongst small companies to limit the financial information which is in the public domain. However, this can make your score lower as the less information the credit references have, the more they have to assume.
Over the next few years Companies House will change their requirements and all companies will be expected to file a profit and loss account anyway.
Generally, the more information you can file, the more accurate your credit score will be. Do not file after the deadline and try to file at a similar time each year.
1. Paying suppliers on time
Many large companies send payment performance data to the credit reference agencies. You should prioritise paying these suppliers on time so that your credit behaviour always looks impressive.
Every company will have different suppliers and you should look at the list of those you pay. Focus on large and national companies as a minimum, such as utility companies.
This should also include keeping within credit limits and overdraft facilities for any banks or lenders and making all payments on due dates.
3. Legal notices
If a company or HMRC issues you with a statutory letter, which used to be 7 days in advance of any action, but is now 21 days, you need to act quickly.
If these reach the court process as a County Court Judgment, they will remain on your credit record for six years, even if you eventually pay the debt owed, when it is shown as ‘satisfied’. However, if you pay the debt in full within one month, you can have it removed from the register.
If a creditor or HMRC issues your company with a winding-up petition, this will be listed as a notice in the “Gazette” in London, Edinburgh or Belfast. Even if this doesn’t reach the court process, that notice will remain on your record and will affect your business credit score.
You can see that “Red” letters chasing for payment, or emails, should not be ignored as they can quickly escalate.
There are many more factors which affect your credit score. Speak to your accountant for more information about Capitalise For Business. Here you can sign up to a free account to understand your credit profile. Or, for less than £1 per day, you can also be alerted to any changes to your credit score and also monitor the financial health of your own customers.