Jo Bostock from the Forum of Private Business explains how you can improve your business's credit rating.
It’s great news that so many wide-format based PSPs are set for growth, but accessing finance can become the stuff of nightmares if your credit score is poor. Keeping on top of your credit rating can be challenging, but here Jo Bostock, business adviser at the Forum of Private Business, provides key tips on how to improve that all important scoreline.
1. Face up to the facts
A business credit report is a vital starting point for any firm looking to improve its credit rating status. These are compiled by a whole host of credit reference agencies and will be based on a variety of information in the public domain about your business, for example your turnover, information on directors, or debts. The report is in essence a recommendation based on this information as to the likelihood that credit will be repaid on time.
You can health check your own credit rating by purchasing a credit report and you should regularly review your credit rating, to monitor any changes and tackle any problems early on.
2. Make amends
It’s worth noting that even what appear to be the simplest of mistakes - such as an incorrect address - can affect your credit history. If you believe that there are mistakes in your report, you can dispute these with the credit agency that compiled it.
You may need to provide copies of documentation to support your claim. If they agree, the credit agency should quickly change the file, though sometimes you'll need to talk to the company that originally filed the data.
3. Beware CCJs
CCJs can have a significant detrimental impact on your businesses credit rating. Regular monitoring of your credit rating will help keep a track on key changes such as this and allow you to tackle these and any other issues of concern before they become a major cause for concern.
Legally, if you had a CCJ registered against you and paid the amount in full within 28 days of the claim being made, then the judgment will have been cancelled and this shouldn't appear on your record. If you paid the full amount at a later date, you can obtain a letter of confirmation from whoever filed the judgment and deliver it to the County Court. You can then ask the court to issue you with a certificate of satisfaction or cancellation, which will involve a court fee. The debt will still appear on your record but will be shown as satisfied.
Prompt action on CCJs is essential and it’s also worth noting that any unpaid CCJs will appear on the register for up to six years.
4. Keep your filing up to date
If your business is a limited company, the credit reference agency will mainly use the documents you file at Companies House to rate you, so you must file regularly and update any changes.
Many lenders won't lend to businesses that are incorporated at Companies House but haven't filed accounts. Make sure you meet Companies House deadlines as late filing is often seen as a sign of financial difficulty.
5. Maintain a good track record
If your business is a partnership, you will be judged on different criteria from a private limited company, because the principal(s) are personally liable. In most cases, a successful trading track record and good supplier relationships will help to secure credit.
6. Be prepared
If your business is not a limited company, you're not legally required to register your financial information with Companies House. Therefore, suppliers may ask for information about your finances directly, so be prepared to provide information on interim accounts and trading figures. You can also contact a credit reference agency with the relevant information that can improve your credit rating.
7. Get personal
If lenders can't find enough information on your company, for example because you're just starting out or are yet to file company accounts, they may look at your personal credit history.
So it’s vital that you pay as much attention to your personal finances as you pay to your business accounts. No lender wants to give your business money if they think it will end up clearing problems with your personal finances.
8. Credit where it’s due
The lack of SME lending has been all too apparent in recent years and in many ways fear of the impact on a business’s credit score could have been a contributing factor. The fact is that lenders continue to be concerned if your business relies largely on credit to finance it. Every time you apply for credit it is noted on your credit report - even if your application was unsuccessful.
If you've applied and been rejected several times, your credit history could be getting worse.
To ensure that you get paid and your cashflow stays healthy so that you can in turn pay suppliers, it is important that you follow good credit control practices.
9. Know your customers
You should monitor your customers' accounts and business performance on an ongoing basis. Before you offer credit, carry out an online search for your potential new customer.
Their websites gives you information about their business, but a search engine such as Google should also throw up other references and articles that will tell you more about their activities and reputation.
For limited companies, do a free web check at www.companieshouse.co.uk to find out:
• Whether the company actually exists and whether you've been given the correct company name.
• The company's registration number.
• The year in which the business started trading – if they are a start-up business you might not want to extend credit.
• Whether they've filed their statutory information on time. Poor administration doesn't suggest a well-run business.
• Whether there are current insolvency proceedings against them.
You should also be looking at the customer's credit report. The importance of finding out business credit ratings is an issue that is often referred to, but rarely properly addressed.
A credit report contains useful information on a business's trading history, credit history and financial history. It also provides a credit rating and limit, and gives you details on the directors' other companies.
10. Clarify terms and conditions
Before supplying or accepting goods and/or services you need to make sure that you are aware of the conditions to which you are committing the company.
Make sure that your standard terms and conditions of credit (i.e. ‘30 days from date of invoice') are clearly stated. These should usually be on the reverse of any quotations with a clear message on the front that they will apply to any order resulting in acceptance of the quotation.
Submitting your terms and conditions with an invoice is usually too late in the event of a dispute. Also make sure that your sales representatives and accounts staff and all other relevant individuals are aware of your terms and conditions, and that they are clearly shown on your website if you sell online.
Distance selling is also covered by further regulations, The Consumer Protection (Distance Selling) Regulations 2005. Ensure you make regular checks on the credit rating of your customers. Remind your customers of the Late Payment of Commercial Debts (Interest) Act, which gives you the right to apply interest to overdue accounts.
Always check that you have not become bound by your client's terms and conditions. Large companies frequently arbitrarily impose extended terms of payment. These can considerably reduce your profit margins or wipe them out altogether after taking into account overdraft charges. If you explain that these could cause you a problem, it may still be possible to obtain early payment from your customer if your account is not a major part of their purchase ledger.
To encourage prompt payment, it may also be worth offering a discount for those customers who pay before the amount of days stated in your terms and conditions.
Invoices should always be sent when the goods or services are provided. Some smaller businesses still dispatch invoices on a weekly or monthly basis, unwittingly giving clients an opportunity to obtain extended credit.
Disputes over terms and conditions can often be prevented or minimised by keeping in regular contact with key decision-makers in your customer's business. This relationship can often influence payment priorities, particularly with smaller businesses.
11. You do the chasing
You should have a routine system in place for following up non-payment that includes letter, email and telephone calls, but be prepared to act more quickly if the amount is large or you are concerned about the customer.
12. Pay on time
Paying your suppliers on time is not only good business practice and beneficial for maintaining good relationships with your suppliers, it is also good for your credit rating too as it is based on the likelihood that you will pay your bills on time. Good references from happy suppliers can also help to boost your chances of accessing finance.