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Your Credit Rating is Probably Wrong

Many businesses manage customer exposures via credit limits but actively managing your own business credit score with the big credit reference agencies should be on you regular to-do list.

The credit rating of your business is ever more crucial to managing your cashflow. It affects your ability to lease or hire equipment or vehicles, buy stock, and win contracts, and even hire staff. However, many credit scores are based on out of date or inaccurate information.

The impact on cashflow of a poor credit rating is fairly obvious - if your suppliers always ask you to pay upfront for your goods you’ll have to find more cash from elsewhere. Lack of credit can also lead directors to expose themselves personally - whether by taking credit agreements in personal names (particularly for vehicles) because it's not available to the business, or by having to supply personal guarantees to underwrite credit facilities. Not only does this affect directors’ personal credit rating but it may also result in increased personal tax exposure. 

Credit ratings have a major impact on your business, your ability to trade and your cashflow. However, a significant proportion of business credit reports contain factual mistakes, from wrongly filed County Court Judgements to incorrectly connecting directors to failed businesses, to inaccurate records of the sector the business operates in. These are all examples of errors that we have seen over the past 3 months.

One of the biggest credit scoring agencies is Experian. They generate a score for every business in the UK, primarily using publicly-filed information from Companies House. Experian calculate a score out of 100 for each business. I'd consider anything over 50 to be reasonable. I have seen some very good strong businesses that have a score of less than 10 simply due to incorrect information.

As an example, we saw one particular business which had a very strong balance sheet, good profitability and the filed figures showed an upward trend. However, they had a credit score of 12. After talking to Experian and cleaning up the data, we saw the score increase to the low 70's. The impact of this meant better supplier credit, improved cashflow and the ability to structure funding in the most tax-efficient, profitable way. Your credit limit can also affect the interest rate that your business will pay.

Even if your credit report contains accurate information, there are still things you can do to improve your credit score - for example, making sure your annual return to Companies House is filed on time. Making sure your accounts are filed within the correct period is also a positive, and if you have a particularly good set of results, ensure you file them as early as possible. Just because you have nine months to file your accounts, doesn't mean you can't file them in six months - get your accountant on the job! 

Your own credit score is so important that you need to pay attention to it – maintain it as you would your factory premises because it absolutely does impact on your ability to do business. A poor credit score is not a given. As a general rule, there are things you can do to improve the way your business is perceived by the outside world.

Steve Grice

Steve Grice

Business Development Manager at Ludgate Business Finance, College Governor at City of Wolverhampton College

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