Having a poor credit score is a current concern for many businesses and in some industries, a potentially fatal one. If a company is deemed to be a poor credit risk, the working capital implications can be significant. Suppliers will struggle to get trade insurance cover for doing business with it and lenders will shy away from providing finance.
Five aspects that affect a credit rating adversely
1. Published accounts
Credit rating agencies depend critically on the information about your business, which is available in the public domain. For all but the largest companies, who supply agencies with a wide range of additional information, this means the accounts filed at Companies House.
The filing requirements for smaller businesses have been relaxed inexorably in recent years. Now they have two choices: to file abridged accounts with limited information about profitability and the balance sheet profile, or to go a stage further and file ‘filleted’ accounts, which omit all data on profitability and the simplified Director’s Report.
However, the less information these contain, the fewer facts and factors the agencies have on which to base their decisions and the harsher their judgments will be.
2. Payment behaviour
Ratings agencies gather a host of data on the payment patterns of businesses. They will share this information with those seeking ratings to use to set credit limits. Changes to payment patterns, such as a slowing of average payment days, are real red flag issues.
3. County Court Judgments (CCJs)
This aspect is one of the most potent negatives for a business’s credit rating and therefore the willingness of suppliers and customers to trade with it and on what terms. At best, the existence of a CCJ against a company indicates inefficiency in dealing with disputes or even the routine payment of bills. At worst, it points to cash flow problems. If the CCJ has been obtained by certain types of stakeholder, such as the landlord or a key supplier, the implications are very serious indeed.
4. Late filing of accounts
A recurring feature of the majority of business failures is late filing at Companies House of at least the latest set of accounts and sometimes regular late filing over a number of years. Credit managers watch out for this for good reason.
5. Broader business model issues
Being dependent on a single or a small number of either customers or suppliers can be marked down, as can a significant concentration of business in a region or jurisdiction with an adverse geopolitical profile.
Related article: The current finance landscape for businesses emerging from the pandemic
Consequences of having a poor credit rating
Very few businesses are so cash rich or cash-generative that they can operate without credit terms from their suppliers and service providers. If the credit rating score is average rather than tragic, then credit terms may be reduced. In the worst case scenario, suppliers who are seriously worried about a company’s credit worthiness will demand cash payment up front. In the very worst situations, they may refuse to trade with the troubled company at all, even on cash terms. The pricing of goods and services can also be affected by credit risk concerns.
On the flip side, a poor credit rating may also deter customers from buying from a business. Supply chain issues are as high up the risk agenda these days as getting sales invoices paid, as global and local disruption makes management teams focus as never before on this aspect of trading. They simply will not take the chance that they are let down if a supplier fails, at least not when they have any alternative suppliers.
Do Coronavirus Loan Schemes impact credit rating?
The various government-guaranteed loan schemes (such as Bounce Back Loans and CBILS) were a lifeline for many businesses during the pandemic, but now they are having a counter-intuitive and negative impact on their credit rating. The government has steadfastly refused to allow the manager of these schemes, The British Business Bank to publish the identities of the borrowers.
For larger companies publishing full accounts, these borrowings and the terms are out in the public domain so that credit agencies can make the appropriate judgments on their impact on the business. For the overwhelming majority of the 1.6m businesses that used the schemes, the outcome has been a bulging liabilities side to their balance sheets and no transparency about the cause. The result is inevitable: their credit rating will be hammered, even if the new facilities might have been good for their finances.
What can you do to improve your credit rating?
Unfortunately, picking up the phone to a ratings agency to explain why they may have got the rating wrong is simply not an option, except for the biggest and most powerful companies. These calculations have little or no human involvement. They are performed by AI systems using those dreaded algorithms. There is no Court of Appeal for such decisions.
The only answer is to address each of the issues identified earlier in this article, of which by far the most important is to consider carefully making more financial information available at Companies House. The limited disclosure regime may well save companies money and reduce hassle for stressed entrepreneurs, but what price a proper credit rating and decent credit facilities?
As a Group, Opus is here to advise and help businesses facing financial and operational challenges. We have extensive experience of identifying and implementing positive solutions in these scenarios. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.