Understanding business credit ratings
To protect your cash flow, it is essential to credit check new customers before giving credit and to continue to monitor their payment practices throughout the business relationship. There are a number of ways to check potential customers' credit worthiness but one method is to purchase status reports from credit agencies. These include full customer details and financial results along with the payment experience of other suppliers, county court judgments registered against them and a recommended credit rating.
What is a credit rating?
Most people are aware of personal credit ratings, where your credit applications and payment record are used to build a profile of your ability to pay back a debt. The same is true for businesses, where credit agencies gather information about trade credit transactions to establish a business's credit rating. Credit agencies use a number of sources to find information about your company which can include payment data from company suppliers, financial reports, web mining, news and media, telephone and other print directories and, if your business is a limited entity, business registration details and financial accounts. In this way, the agency generates a report of your company's credit history and uses this to generate a credit rating which suppliers, as well as banks and other finance providers, can use to gauge whether to extend credit to you.
How are credit ratings calculated?
Whether you pay your bills on time is a vital part of the calculation of your credit rating, but it can also be affected by a number of other factors such as ratios gleaned from your company's filed accounts, the length of time you've had a credit profile, the number of inquiries made on your credit profile, possible bankers' information (subject to you giving permission for this to be made available), credit card details, if you are a proprietor or partner using credit cards as one of your purchasing tools, and also information that may be available on company credit cards. Business credit scores range on a scale from 0 to 100, with 75 or more considered an excellent rating, and some reports may have written recommendations as well as, or instead of, 'credit scoring'.
Improving your business credit rating
There are a number of ways in which you can help improve your business's credit rating:
- Always pay on time: the payment experiences of your suppliers is a key part of your credit profile so to drive a positive credit rating you should always pay to agreed terms, if you don't you can detrimentally affect your ability to get credit, not only from suppliers, but also from banks and other finance providers.
- Ensure that all relevant trade experiences are represented: a lack of information on your profile can be just as harmful as a poor credit history. There is no requirement for companies to send information about their customers to credit bureaux, so the key to establishing a business credit profile and high rating is to forge relationships with companies that will establish credit for your business and who may report positive information when asked, as part of a trade reference request.
- Get listed and keep your registrations up to date: credit agencies check various sources such as online services and Companies House to confirm that your business is genuine, so ensure your business is listed in online and telephone directories and, if you are a limited company, that company registration details are accurate and up to date, and that accounts are filed on time.
- Keep your personal finances in order: credit agencies can offer the option of reviewing the personal credit profile of key individuals, particularly within smaller businesses which do not have a detailed business credit rating, so it is important to keep on top of your own finances.