Negotiating business financing or favourable credit terms from suppliers is a challenge at the best of times. With credit markets so tight, it can seem borderline impossible.
Ratings agencies can make life more difficult than it has to be. Recent research from accountancy firm Shelley Stock Hunter revealed that different agencies can offer widely varying ratings and credit limits for the same company. Experience suggests there are inherent flaws in algorithms these agencies use to work out your rating, which at worst make their assessments wholly inaccurate.
Moreover, the lowering of a credit score by rating agencies can create a vicious cycle. Not only are the interest rates a company pays likely to go up, but other contracts with financial institutions may be affected, causing an increase in expenses and ensuing decrease in creditworthiness.
See also: Do business credit scores matter? – Having control of your budget and understanding your personal credit history are great foundations for any growing business, says Experian’s Ade Potts. Here’s why.
In some cases, large loans to companies contain a clause that makes the loan due in full if the companies’ credit rating is lowered beyond a certain point. The effect of such ‘ratings triggers’, however, can be devastating. In a worst-case scenario, once the company’s debt is downgraded by a credit rating agency, loans become due in full, and, since the troubled company likely is incapable of paying all of these loans in full at once, it is forced into bankruptcy.
There are a number of factors that can affect your credit rating, which include the age and structure of the company, the payment history and current payment capability, and the classification of your business.
The longer established the better is the general rule. The number of directors in a company also affects the rating. Having only one director raises questions about the long-term stability of the business should the entire organisation rest on the shoulders of one person. If a director of the business has been linked to a failed company then this will have a negative scoring.
Also, if for example your business is linked to the building sector then its rating may have been significantly downgraded in the past two years. In another example, an occupational healthcare company which recently sought help was wrongly classified as a sports goods manufacturer, a description that had serious implications on its credit rating.
Businesses are often assigned a numerical credit score between 20 and 100. The higher the score, the safer the credit risk. As a rule of thumb, a score of 80 indicates that a business pays its bills on time. A score of 80 is usually the minimum required to qualify for business credit. A score of 70 or below indicates that a business has made late payments, anywhere from 15 days all the way to 120 days and beyond.
The level of information available to the credit rating agency is also important, because a lack of up-to-date financial information is one of the main reasons why companies receive poor credit scores.
To remedy issues surrounding credit, businesses should check their status with credit ratings agencies, and get in contact with them if there are inconsistencies. Challenge them on issues that might actually be financially trivial, such a £20 county court judgment, but have an enormous effect on the businesses rating. If there is an issue cropping up on your credit rating report, explain the details of it to a potential supplier.
Also consider strengthening the board of the company. It is important to develop a relationship with your corporate rating agencies, with one option being to open up dialogue with these agencies and inform them of the key financial statistics of the company, providing valid explanations for actions.
A strong rating will make it easier to get approval when applying for any type of business financing, whether it’s a term loan, commercial mortgage, line of credit, business credit card, or trade terms from one of your vendors.