ExEcutivE REPORt All credit to the business
Access to cash can be restricted or can carry a burdensome cost if a borrower is seen as risky, but what does this mean for businesses? Adam Bernstein reports…
redit checking effectively ties an individual’s record to publicly available
information and that which is shared by financial organisations with credit reference agencies. However, not everyone appreciates that the process applies to businesses too. Basically, if firms want the best terms they need to maintain a good credit score.
A question of risk A credit score is a measure of creditworthiness and is made up from several different factors to understand financial position and level of financial risk. This information is combined to create a score which influences whether companies are seen to be a repayment risk. Experian, for example, uses a system that gives a credit score that can range from 0 to 100, with 0 representing a high risk and 100 representing a low risk. 0, for example, would be applied to a failed company, 26-50 to an above average business, while 91-100 is a very low risk firm.
Equifax, in comparison, aims to rank relative strengths of businesses against each other on a scale regardless of size, so a business that is scored 20 out of 100 is seen as less able to support credit than a business that scores 80 out of 100.
Business information is held by several credit reference agencies and comes from multiple sources, including creditors such as banks, credit card companies and building societies, as well as publicly available records such as Companies House or the main Gazettes.
It's collated along with data on payment performance, County Court Judgments (CCJs) and bankruptcies. Of course, it’s entirely possible that a business can hunt down some of the information itself. But the benefit of using a credit reference agency
follows from the fact that the agencies look at data in various ways, using aggregated data sources and applying analytical methodologies to build the score. Fundamentally, they use databases that have been built up over time to understand how businesses that were created historically have performed over an extended period.
Of good report It’s precisely because of these processes that businesses should try to maintain a good report, as it influences their ability to make purchases. But while business credit ratings are not as ubiquitous as personal credit ratings, they are more prevalent when dealing with larger purchases or lending decisions.
Multiple uses The wonder of information is that it invariably has more than one purpose. Just as a credit report allows a lender a window into the world of a (potential) borrower, so the process can be reversed by a business looking to check on its suppliers and its (corporate) clients to ensure they can pay for their goods and services. It’ll also help set credit terms granted to clients.
But checking potential clients for their ability to pay isn’t the only advantage of credit checking. Credit information also helps fight fraud, in that a business can confirm contacts and clients are who they say they are – and that their business is performing the way they say it is. It’s also useful when checking on the financial viability of suppliers as any failure can be financially devastating in terms of supply and spares.
Services on offer Credit reference agencies offer a variety of services to support businesses, such as ad-hoc credit reports or data for account opening and account management. Each agency has its own variants. Equifax, for example, offers products to age verify, bank account verify, document verify, and more.
The problem for those with little to no financial history – known as ‘thin file’ businesses – is that they may struggle to be accepted or get the best rates. In these circumstances, a business owner’s or director’s personal credit scores can be considered to help with the decision.
Where information held is inaccurate or plainly wrong, steps should be taken to correct it. The only option is to dispute the business credit report by contacting the relevant credit reference agencies. Not only can they correct data that can be shown to be inaccurate, but they also have services to review company reports.
The costs associated with credit information aren’t as horrific as might be expected. For example, Experian’s Business Express allows the checking of clients and costs from £25 per month. Alternatively, to check a business’s own credit score, Experian offers My Business Profile at a cost of £24.99 per month. Costs from Equifax are given on enquiry.
In summary Like it or not, credit information exists and is here to stay. Whether it’s to borrow or to seek terms with a supplier, having a whiter than white report is going to put a business head and shoulders above its rivals. n
16 Executive Hire News - August 2021
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