The process of credit checking a business can sometimes be shrouded in mystery and mistrust. Here Martin Williams, managing director of commercial credit checking and analysis company Graydon UK, reveals a few tricks of the trade.
Why is a credit rating important?
If you’re like other Sage customers, you worry about late payments. It’s the top concern for our customers, with 47% concerned about late payments and how they affect their business. Credit checking your prospects can reduce the amount of late payments and improve your cash flow.
But it’s not just other business’s credit rating that matters. Yours does too. It can affect who will work with you and how much credit you’ll be offered.
How is a credit rating calculated?
A lot of people think that credit scores are just about balance sheets. Although that’s a major part, they’re not the only thing that’s taken into consideration. Other elements that are analysed include:
- A business’s age
- Its industry sector
- The number of employees
- Trade payments
- Whether there are any County Court judgements for non-payment
- Any loans, such as mortgages
- The backgrounds of individual business partners
Make sure that you’re paid on time
Check your customers’ credit ratings
Before you go into business with a company, you can check their credit rating. There are tailored services to allow smaller businesses to do this.
Barclays’ Credit Focus www.creditfocus.co.uk is aimed at businesses with a turnover of less then £1 million. Or, if you’re a Sage One customer, you can use Live Ledger https://ledgerlive.fundingoptions.com to check your customers’ ratings.
Make it easy to get paid
Always check the terms of payment – with larger companies, for example, you often need to request a purchase order number from the accounting department, and you won’t be paid unless you have quoted it on your invoice. Be sure to ask whether there’s anything you need to put on your invoice to help process it.
Take away any excuses for non-payment. For example, before the due date of payment, contact the customer. Check that they have received what they wanted from you and they’re happy with it, and then reiterate when you expect to be paid.
Building up your credit rating
Consider the money in your business
Although it might be tempting to take all the profit out of your business, think of the impact this will have on your balance sheet. It may be growing, but if you remove all the profits, it risks looking in the same financial state 10 years down the line.
Retaining some of the profits within your company will build up equity and improve your credit score.
Constantly review your balance sheet and make sure the outside world sees your business growing as you do. Indicators of long-term solvency – such as the ratio of how much your business is financed from outside parties versus its own generated finances and shareholder equity – is another big consideration.
Think about what your business looks like to the outside world – what if you have a loan that is high in relation to shareholder equity? Or what does it look like to have just £2 of issued share capital?
Pay your bills on time
Don’t dither in paying your bills and always pay by the due date. Late payments can affect your credit rating.
Make use of tailored services
For many smaller businesses, especially the newer ones, a good credit score is sometimes very difficult to obtain.
Traditional credit assessment methods use financial information from annual accounts filed at Companies House, which can sometimes be up to 20 months out of date.
But there are services to help smaller businesses. CreditPal http://www.creditpal.co.uk lets you control how your business is credit assessed so it’s judged on its current financial position. This can help you show your business’s health to your prospects and suppliers.
Have you had any challenges with credit ratings? Let us know in the comment section below.
