Don’t operate in the dark over your credit rating

Don’t operate in the dark over your credit rating, say the Credit experts at Experian

The commercial credit score of a company is an indicator of its financial health. Credit scores form a critical part of the decision making process for financial and commercial lenders, service providers and suppliers; in short, it determines whether you get to extend your credit facility, to help fund the growth of your company, or not. A poor credit score can impact your ability to secure additional funds or get great deals from suppliers to better control overheads.

However, many SMEs have a narrow understanding of their credit score, how the process works and the impact it can have on their business. Worryingly, only two in five SME organisations have ever checked their commercial credit score. Those who do check, tend to do so out of curiosity rather than to find out how they can manage their score.

When it comes to safeguarding its access to credit and knowing the factors that could impact its credit score, the SME community’s awareness levels are also poor. In the UK, 87% of SMEs – which equates to 1.9 million UK businesses – have limited awareness of how to safeguard their access to credit. Plus, only one in eight (13%) UK SME financial decision makers have a complete awareness of the key factors that could influence their credit score, both positively and negatively.

For example, bankruptcy and numerous applications for credit accounts in a short time period can negatively impact your credit score, but only 46 per cent of UK SMEs are aware of this. However, 78% of SMEs can correctly identify that prompt payment to suppliers and filing annual accounts on time has a positive impact on your credit score, but only one-fifth knew about both of these factors. Many SMEs believe the following factors have a positive impact on their credit score: a healthy bank balance, paying bills before the due date, taking on more employees, and moving into bigger premises. In fact they have no bearing on it.

The situation is problematic – a lack of insight is leaving SMEs to operate in the dark regarding their commercial credit score.In the long term this can impact on their financial reputation, cash flow, and business growth. Yet, the problem can be easily rectified by putting a few simple processes into place.

Here are some useful tips for SMEs:

Check your credit score regularly

Credit scores should be checked regularly – at least every six months – and if it’s looking bad, a plan should be put in place to improve them. Also, company directors must keep an eye on their own personal finances; if financial data on a business is scarce, the data available on the directors as consumers will be taken as an indicator of the company’s commercial integrity.

Know what impacts your score

Knowing what impacts and helps your credit score is vital. Bankruptcy, numerous applications for credit accounts in a short time period, and County Court Judgements can damage your score. Prompt payment to suppliers, filing annual accounts, and registering your business with a credit reference agency or directory, all have a positive impact on your credit score.

Improve your score by paying your invoices on time, as a worsening payment trend is a key indicator of a deteriorating cash position. Know the deadline date to submit your company’s annual return by, as late filing can be a sign of financial distress. And, remember to tell your utility suppliers when you move premises and pay utility bills in full as outstanding bills can go against your records.

Make credit checking part of your company’s protocol

Credit checking should be ingrained into your company’s code of conduct. Code Print, a Nottingham-based small print-management and promotional-gift business, does this.“I see it as an insurance policy”, comments Phil Simpson, Managing Director of Code Print who has used credit checking products since the company’s first day of trading. It forms an essential part of his ‘toolkit’ in operating the commercial aspects of the business.

Run a status check on new customers and suppliers

When dealing with a new customer or supplier, run a status check as four out of ten registered businesses never go on to trade at all. Make sure you are dealing with a real business by confirming the address and building the company is trading at, and call the phone number that is registered to the company. If in doubt, ask for a reference from another company.

Run a credit check on new customers and suppliers

Run a credit check on any potential customer, supplier or partner. Only a third (34 per cent) of SMEs run a credit check on new business customers, and just under a half (45 per cent) run a credit check on new suppliers. To avoid the risk of financial exposure, check out a company’s commercial credit score, their credit status, trading history, and their ability to pay bills in time.

Keep monitoring customers and suppliers

Even if a customer or supplier has previously proven themselves reliable by paying or delivering on time, keep monitoring their credit performance, to mitigate risk. Phil Simpson, Codeprint, comments: “Suppliers are a key element of our business so knowing if one of them could go ‘pop’ at any moment means that I can safeguard our business and manage customer expectations quickly, either by negotiating terms upfront or changing supplier in the worst case scenario”.

Operating home and away? Be consistent

And finally, when trading internationally, put the same checks in place as you would in your home country. Set up access to an international credit report, learn about a company’s credit history, and set appropriate payment terms and credit limits.