We frequently discuss credit ratings with our customers in our role as their management accountants and business advisors. This article is written with the intention of helping you understand and manage your business’s credit rating.
A credit rating is a score applied to your business by credit reference agencies, to demonstrate your financial risk and stability.
Your suppliers may use this score to decide if they would like to supply your business with goods and services on credit, that is without being paid immediately. If your business has a good score, you will find that your suppliers will be more willing to offer you credit than if you have a lower score. It will help you open and operate trade accounts with suppliers, so that you can make all your payments at the end of the month rather than having to make lots of smaller payments every time you buy something.
Your customers may also be interested in your credit score particularly if you are working on longer term contracts. Tendering applications may consider your credit rating, as they consider your financial stability, when considering your ability to fulfil a contract.
The credit reference agencies use extensive tools to work out that credit score and to keep it update. Among other resources, they will consider the following
Your company’s confirmation statement needs to be filed every year at Companies House with a deadline of 14 days from the anniversary date of when your business was incorporated. Your company’s annual accounts need to be filed within 9 months of your financial year end. If you are late with either of these filings, Companies House will put a flag on your company to show that you have not submitted on time, and this flag is public information that anyone can view.
A late filing flag may well reduce your credit score. This is a simple element of the credit score that all limited companies can manage easily by exercising some good housekeeping and making both these submissions on time every year.
Your credit score is also impacted by the content of your annual accounts that you submit to Companies House. Companies that report high profits and have a stronger balance sheet, can expect to be rewarded with a high credit score. We have a small word of warning for those smaller companies who are permitted to file less detailed accounts which only contain a balance sheet, as the balance sheet can sometimes hide the full story of a business’s profitability, as in the following example.
We knew of a company that had had several really strong financial years and had been successful in generating lots of funds. As a result of this success, the company was able to pay a large dividend out to shareholders one year. However, they only filed abbreviated accounts with Companies House that contained a balance sheet and not a profit and loss account, and the balance sheet alone did not show the full picture. It simply showed that the business had a lower bank balance in the current year than the previous year, and consequently, the credit reference agencies reduced their credit score.
If your business has had an unusual trading year, it is worth considering whether to file full or abbreviated accounts at Companies House. The credit score should be one factor in this decision, and many small companies will still prefer to file only a balance sheet as they prefer to release limited information into the public domain.
Your credit score can also be influenced by how quickly you pay your suppliers. The credit reference agencies utilise data collection systems that enable supplying companies to share their payment experiences, which are analysed and fed into the credit score. Businesses that have been taken to court for late payments can be awarded a CCJ – County Court Judgement – against them, which is another factor that can reduce a credit score. We recommend paying your suppliers promptly and resolving disputes swiftly.
If your housekeeping of accounts isn't too good, JRMA can take it off your hands. Leave us a message at info@jrma.co.uk or call us on 01905 796512.
