How to… be more credit savvy

20 August 2012
How to… be more credit savvy

Having a good credit rating can affect so many aspects of running a restaurant, pub or hotel, and yet all too often it languishes at the bottom of the priority list, especially when you are just starting up a business in the industry.

Many owners think of credit scores as purely affecting their ability to access finance, while worryingly, others don't think about them at all. In fact, most are just not aware of how external factors can affect their credit scores as they grow and progress.

A low credit score can have a wide variety of consequences - for instance, when it comes to securing the best possible deals on business essentials such as utilities, telephone or banking. These suppliers rely upon credit history, gained from organisations such as credit ratings agencies. Instead of sitting back and assuming the best, you can proactively manage your credit history to make sure that you are being seen in the best possible light.

The same applies when it comes to making big changes, such as buying or renting new premises. If a location change is not reported to Companies House or registered with directories such as Yell and Thomson, a company's information may appear far less robust. There may be questions about whether you are still afloat, or you could find yourself aligned with the negative credit score of another business that has taken over your previous location.

On the other side of the coin, if you don't manage your customer base well by keeping an eye on their credit scores, you could also run into problems. This applies to large customers, too. All too often, we've seen stories of large companies going under and affecting their whole supply chain along the way.

The economic challenges faced by pubs, hotels and restaurants are well known and it's vital that all businesses do their best to protect against financial risks. If you are proactive in identifying and mitigating potential problems well in advance, when it comes to borrowing money or building a relationship with a supplier, life can be that little bit easier.
Max Firth, MD, Experian Business Information Services

Tips for building and maintaining a positive credit profile

1 Be proactive Start building a credit profile for your business early. Ensure your business is registered with online directories such as Thomson or Yell and approach credit reference agencies to see how you can improve your score. Encourage suppliers to provide feedback and share data on how your payment records are seen externally, to assess whether your business is being represented in the best light.

2Consider a partner If you are just starting up, it may be advisable to try and find a partner director, especially one with previous start-up success. Credit ratings begin by assessing the directors themselves and their history of previous business ventures. Not only will you positively impact your new business's credit score, but you will also share challenges and benefit from extra experience.

3 Do the basics Privately owned businesses don't always take the time to register pertinent information with business directories or file full accounts with Companies House. This lack of information will translate to a higher level of potential risk in the eyes of lenders.

4 Check out your customers and your suppliers Being credit savvy is not just about you. Monitoring the financial health of your customers and your suppliers on an ongoing basis can help avoid nasty surprises.

For instance, with a corporate client, find out how they are paying their other suppliers and if they are showing signs of difficulty. Address the problem early and, if necessary, scale back your business with them.

With suppliers, if you are fairly new to the industry, you are likely to get asked to pay up front before the goods are delivered. But if that supplier goes bust in the meantime, you will be left out of pocket and with no goods, as well as the challenge of finding another supplier quickly so that you can continue to operate.

5 Don't put all your eggs in one basket Try not to create too much reliance upon a few large customers. Diversify where possible to reduce the risk of being caught out if customers run into difficulty. It is worth investing in quality marketing lists that will enable small firms to proactively focus on the best leads.

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