Improve your company credit rating

25 April 2002 by
Improve your company credit rating

Debra Pennington, head of intelligence at credit rating agency Graydon, discusses how to maintain and improve your credit rating.

The problem

You have found that your company has a very poor credit rating, even though you have never defaulted on any payment in your life. It's now seriously affecting your supplier accounts.

The law

There is not a lot of law that applies here, apart from data protection issues (Data Protection Act 1998), where there is a right to confidentiality and for information to be held accurately, and the Companies Acts.

Expert advice

Firms and partnerships are judged differently from a private limited company, because the principals are personally liable. In most cases, a successful trading track record and good supplier relationships will yield the credit required. For unincorporated businesses, the more information credit agencies have, the more comprehensive the rating. It pays to invest some time when approached by a credit reference agency for an enquiry.

Limited companies face another set of guidelines. Credit reference agencies provide a service that includes an opinion or a recommendation based on information that the agency has collated on your firm, through public information and their own investigations - such as historical trend analysis, appreciation of the economic environment and, in some cases, direct contact by telephone.

They start with the documents filed at Companies House, especially when trading accounts are filed. Therefore, keep filing information up to date, don't delay in recording changes of directorship, and keep within the statutory filing requirement dates - seven months for a public limited company, 10 months for private limited businesses.

Each credit agency has its own formula by which it rates companies, but there are certain common principles.

Current filing requirements are fairly minimal for small companies, but the data provides key indicators on performance. The bottom line is always significant. This is a company's net worth - the sum of the issued share capital and the balance on the profit and loss account. A business should keep the net worth positive. Movements in the net worth will affect the credit rating.

File profit and loss accounts, so that any downward movements in the net worth can be seen to be drawings or losses. The natural assumption is that negative impact on the net worth of a company is due to losses. However, a drop in the value of a profit and loss account can also be caused by dividends being taken out, exceeding the profit for the year.

Another trick is to retain some profit in the business, thereby increasing the net worth each year. This shows that more is being retained and invested in the business - a favourable prospect for a good credit rating.

Look at share capital. How much have you invested in your own business, while expecting suppliers to grant credit on unsecured terms? Have you, as a director or shareholder, loaned the company money which you have no intention of redeeming? Consider capitalising such a loan, as this will increase the net worth and most likely will have a positive impact on the credit rating.

Record borrowing terms accurately - loans and overdrafts are different. Bank loans, other than the portion falling for payment inside one year, which are included in overdraft values, will have an effect on the working capital position. As working capital is a measure of cashflow, it follows that negative working capital will be taken into consideration for a credit rating. A negative working capital position raises a few concerns. It indicates that the company could be suffering from a cashflow problem, or is overtrading.

Pay suppliers within agreed terms - in today's economic environment, more and more payment data is used by credit agents as a guide to current creditworthiness.

More obviously, avoid negative information, county court judgments, and petitions for winding up. With the current market conditions and in the prevailing "rescue culture", there are more avenues for mediation than ever before.

Check list

  • Keep information accurate.

  • Retain profit in the business.

  • Invest in your business.

  • Pay suppliers on time.

Contacts

Graydon UK
Hyde House, Edgware Road, London NW9 6LW
www.graydon.co.uk

Information Commissioner
Fax: 01625 524510
www.dataprotection.gov.uk

Beware!

  • There are different rules for incorporated and unincorporated businesses.

  • Keep away from county court judgments, etc.

  • Negative information will adversely affect your credit rating.

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