How Healthy is Your Credit Rating?

The credit rating of small businesses doesn't just affect how much cash you can borrow. It can also affect the amount and timing of the credit your suppliers will allow you, and whether you can source materials from new suppliers as quickly as you need them. It can even affect your order book if potential customers believe your finances are not sound enough to be sure you will be able to complete a contract. Some businesses will not trade with you at all if they believe your credit rating is poor. You really do need a good credit rating.

Different Credit Agencies May Give Different Ratings

That's okay, you say, you already have one. That's good, but unfortunately when other people check it, they may not get the same picture. It could depend whether they check it with the same agency as you do. If you compare recommended amounts of credit from several different agencies, you may get a very wide variation in the amounts.

Accountancy firm Shelley Stock Hutter decided to check 100 companies with three different agencies over a period of two years. They not only found these massive variations - one company's credit limit recommendations varied between £7,000 and £290,000 - they also gave very different limits when checked again a few months later.

At present the agencies do not have to divulge how they make their decisions. They all use different kinds of information to measure credit risk, but it is hard to see how they can justify such broad fluctuations. Nevertheless we have to live with them.

What Can Be Done About it?

When you are deciding whether to do business with other companies, you'd be wise not to rely solely on a single credit rating. Where appropriate, ask to see business plans and management accounts. Your outsourced bookkeepers would most likely be able to give these a once over for you, and let you know how they feel about them. Unless you can cover the risks, don't take any chances. Perform a mini due diligence exercise.

Where you are seeking credit for yourself, you need to offer your own up-to-date business plan and accounts for scrutiny. Again your outsourced bookkeepers could help with the preparation of these. It would be a really good idea to get at least a template of these prepared so that they can be made available at short notice whenever they are needed.

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