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The Ultimate Power Of Credit Agencies - Businesses Watch Out

Getting business financing or favourable credit terms from suppliers is a challenge in the best of times. In difficult economic times, with credit markets so tight, it can often seem borderline impossible. For businesses a good credit rating is key.

The recession has an obvious impact on the credit ratings of companies but there are inherent flaws with the way and the algorithms that these agencies use. At best ratings for many companies are 'reasonable' but at worst, they can wholly inaccurate and leave the organisation with many seemly insurmountable problems.

The lowering of a credit score by a credit rating agencies can create a vicious cycle, as not only interest rates for that company would go up, but other contracts with financial institutions may be affected adversely, causing an increase in expenses and ensuing decrease in credit worthiness.

In some cases, large loans to companies contain a clause that makes the loan due in full if the companies' credit rating is lowered beyond a certain point. The effect of such 'ratings triggers', however, can be devastating: under a worst-case scenario, once the company's debt is downgraded by a credit rating agency, the company's loans become due in full; since the troubled company likely is incapable of paying all of these loans in full at once, it is forced into bankruptcy.

There are number of factors that can affect your credit rating, these include:

The age and structure of the company

The longer established the better. The number of directors in a company also affects the businesses rating. Having only one director raises questions about the long-term stability of the business should the entire organisation rest on the shoulders of just one person. If a director of the business has been linked to failed company then this will also have a negative scoring.

The classification of your business

If for example your business is linked to the building sector then it's rating may have been significantly downgraded in the past two years.

Clive Newell of Halagen, found that an occupational healthcare company that he was called in to help, was wrongly classified as a sports goods manufacturer– the descriptions were poles apart and had serious implications on it credits rating. "These credit scores are in the public domain so they should come with a large health warning," he said.
The payment history and current payment capability

Businesses are often assigned a numerical credit score between 20 and 100. The higher the score, the safer the credit risk. As a rule of thumb, a score of 80 indicates th at a business pays its bills on time. A score of 80 is usually the minimum required to qualify for business credit. A score of 70 or below indicates that a business has made late payments, anywhere from 15 days all the way to 120 days and beyond.

Halagen also found on investigation for another multimillion-pound client company that it had a county court judgment of only £30 registered against it. The company's rating was significantly and disproportionally affected by this. However, it is important to remember that businesses have the right to dispute a debt and that was the actual scenario in this case. The issue was confronted immediately and discussed with the credit rating agencies to resolve the situation.

The level of information available to the credit rating agency

The lack of up-to-date financial information is one of the main reasons why companies receive poor credit scores.

"This lack of data is known to damage companies' credit scores just as it does with personal credit scoring. One of the problems are that credit scores are often determined by statutory filings of accounts at Companies House. These can often be up to 18 months out of date," said Clive Newell.

Maintain a strong business credit rating

A strong rating will make it easier to get approval when applying for any type of business financing, whether it’s a term loan, commercial mortgage, line of credit, business credit card, or trade terms from one of your vendors.

If you want to improve your business credit rating, it helps to know exactly how the rating is determined. Banks and other lenders use data from one or more credit reporting agencies when analyzing the creditworthiness of any potential business borrower.

What You Should To Do

  • Check out your credit ratings with agencies like Experian and Dun and Bradstreet. See if there is a problem or, indeed, inconsistencies with the ratings
  • Call the credit agency and explain what and where the inconsistencies are. Challenge them on issues that might actually be financially trivial, such a £20 county court judgment, but have enormous effect on the businesses rating.
  • If there is an issue cropping up on your credit rating report, explain the details of it to a potential supplier.
  • Consider strengthening the board of the company, an experienced FD, whether full time or part time is worth considering.
  • It is important to develop a relationship with your corporate rating agencies. Open up dialogue with these agencies and inform them of the key financial statistics of the company, providing valid explanations for a company’s actions.
  • Get advice from a specialist on actions the company should take to maintain a certain rating.


Contents

The Ultimate Power Of Credit Agencies - Businesses Watch Out
  1. The age and structure of the company
  2. The classification of your business
  3. The payment history and current payment capability
  4. The level of information available to the credit rating agency
  5. Maintain a strong business credit rating
  6. What You Should To Do

(Clive Newell, December 2010)

 

 

 

 

 

 

© Halagen Limited 2012