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CREDIT WHERE CREDIT’S DUE


THE ENERGY DESK’S MANAGING DIRECTOR IAN EDWARDS TAKES A LOOK AT THE BEST WAY OF GETTING CREDIT TO PAY FOR ENERGY USE


T


he global financial downturn affected all aspects of business and consumer life, including the energy sector. This has


been particularly noticeable in relation to the issue of energy procurement. Even an organisation with a high


credit rating will wince at the prospect of a utility company’s credit check. If you haven’t undergone one of these credit checks yourself, you may ask why. For most, the answer will undoubtedly be the same: the depth and detail of the credit check is incomparable to any other, and a poor credit rating can pose a host of challenges when it comes to purchasing energy. Methods of energy procurement have changed significantly over the past few years. An organisation was once able to pay for the energy it used in arrears, but must now calculate projected energy consumption, sign contracts for anything from two- to five-year terms, and pay hefty deposits of three to six months to the utility company upfront.


POTENTIAL PROBLEMS FOR YOUR BUSINESS Your credit rating determines the terms of your energy contract, including the tariff, deposit value and contract timeframe. If you’re a new company,


without historical accounts, you will have little or no credit rating. If you have a high credit limit of £1m but your credit score from Experian falls below 51, your potential supplier will probe into your accounts, and this has become a common problem within the leisure and retail industry. Having a low credit rating will undoubtedly result in your business being tied into a contract on a higher tariff. What’s more, if you are unable to enter into a contract with a utility company, you won’t benefit from lower contract rates and your tariff could rocket to three or four times higher than the contract tariff. With the UK sport and leisure industry spending an estimated £700m every year on energy use, this can present huge challenges in the management of cashflow. But providing energy is not without risk to the supplier. Utility companies will buy your energy upfront and your credit rating is the only factor that can indicate the risk you pose to them. For example, a £500k spend on a three-year contract adds up to a £1.5m energy spend that the supplier will have to purchase upfront. If you have a low credit rating, you will – in the eyes of the supplier – be at risk of defaulting. Without a guarantee of payments, utility companies will risk taking on the financial burden should you not use


or not pay for the energy they have invested in on your behalf. Yet it remains a fact that poor credit, coupled with UK government pressure to reduce usage and carbon emissions, is leaving companies with a difficult dilemma. With the deposits taking up so much of a company’s credit limit, little budget is left to purchase energy-saving technology to meet UK government targets. In some cases, companies have no budget at all to invest in consumption reduction equipment and systems.


ADDRESSING THE CREDIT CRISIS But there are solutions on offer. Ultimately, to effectively manage your energy costs, you need to be in control. There is no denying that energy prices are set to soar and a valuable means to combating the increase in cost is to get a handle on the energy you use and find ways to cut back your consumption. Though the health of your credit rating is critical to your energy procurement, there are ways and means of ensuring that payment for utilities won’t break the bank. Timing is everything. If you purchase your energy at the right time, you can tie yourself into a more economical contract. Consultants and purchasing consortia are also in a position to speak to your


“UTILITY COMPANIES WILL BUY YOUR ENERGY UPFRONT, AND YOUR CREDIT RATING IS THE ONLY FACTOR THAT CAN INDICATE THE DEFAULT RISK YOU POSE TO THEM”


64 Read Health Club Management online at healthclubmanagement.co.uk/digital july 2012 © cybertrek 2012


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