Industry Insight
At the repair shop A broker’s guide to business credit ratings James Piper Managing Director Lightbulb Credit
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or businesses, credit ratings have a direct impact on borrowing of any kind, as well as trade terms, working capital and tendering. If a rating is low, it can have a negative influence on the rates and terms offered, or completely restrict access to funding altogether. The direct correlation between ratings and these key financial aspects of a business is not always recognised, and as a result many companies settle for higher rates without knowing they could access any better. To better advise their clients, brokers can also benefit from understanding how ratings work in greater detail. This knowledge can be used to help improve a client’s position before the funding application is submitted to ensure the best possible outcome. There are six main credit rating agencies in the UK and all limited liability partnerships (LLP) and limited companies are rated using their algorithms. All utilise data from Companies House, alongside payment data collected to evaluate how suppliers are paid against agreed credit terms. This combined data is then used to determine a company score and generate a recommended credit limit. Each agency has its own unique algorithm and scoring methodology. As a result, disparity between agencies and ratings is not only common – it’s actually the norm! Therefore, having visibility of scores across the whole market is much more valuable than only checking scores with one agency. For brokers it’s also useful to know that two of the six agencies have traditionally dominated the funding approval market. The key to gaining optimum funding for a client is to maintain an awareness of these specific scores and take direct action when needed to improve them. 40 | NACFB
There are other factors that can have an impact on ratings, even something as simple as a business having the wrong SIC code can throw a score out. More significant factors include CCJs and the type of filing they choose to complete for Companies House. For example, businesses turning over less than £10.2 million can legally file exempt accounts, enabling them to file only a balance sheet rather than a full P&L. From an accounting point of view this is considered timesaving, but this simple action then makes it hard for the rating agencies to score them accurately due to the lack of public data available. When presented with a lack of data on a business, the agencies will always take the risk averse view, resulting in the company getting a lower score and credit limit. To maximise funding opportunities, it’s critical that the data available on a company reflects their current business performance before making the application. Business credit repair is a new concept in the UK and many business owners don’t realise that they can challenge a poor rating, or that it’s possible to get scores re-evaluated and improved quickly using real time data. By building credit repair into the funding process, brokers can not only maximise their opportunities, but also add real value to their clients in the form of insight and in many cases, a more positive funding outcome.
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Many business owners don’t realise that they can challenge a poor rating, or that it’s possible to get scores re-evaluated and improved quickly
