Business credit ratings have been around for a long time, but despite this many companies still do not understand the direct impact they can have on day-to-day operations, and more importantly on business continuity and growth.
Borrowing, working capital, tendering and trade terms are all directly impacted by business credit ratings, but many business owners still do not really monitor their ratings or have an awareness that they can be improved. With more credit checks being done than ever before, and each credit rating agency having a different approach, it is vital to get specialist help in this area.
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A good credit rating is critical for businesses frequently purchasing stock and materials, hiring equipment, and leasing premises. It is also a pre-requisite to meet the often-strict criteria when tendering for larger contracts. A lack of attention to detail in this area can seriously disrupt the supply chain in manufacturing and quickly put businesses in jeopardy.
With the impact of COVID-19 changing the business landscape permanently, companies in the UK are facing turbulent times. Creditsafe data from April of this year reported 61 per cent of all invoices being paid late, which is a 41 per cent increase on last year. The challenge for businesses operating in the manufacturing and technology sectors is going to be how to re-build themselves with barriers such as limited cashflow, reduced credit and the filing of poor accounts, all because of reduced trading during the pandemic.
In the current climate, the threat of CCJs and insolvency is also very real and acting quickly is paramount to ensure businesses can be saved. Although CCJs have slowed in the first half of 2020, thought to be as a direct result of the courts closing because of COVID-19 and changes to the Corporate Insolvency and Governance Act, the value of CCJs issued has increased by 16 per cent in the same period. All indicators point to CCJ activity not only reaching previous levels, but as we see the teeth of the recession bite, increasing to higher levels than previously seen.
Whilst targeted government support in the form of tax breaks, CBILS loans and extending the deadline for year-end accounts are helping businesses stay above water in the short-term, this is still creating further debt. Equally the injection of support from the government has not slowed the stretching of creditors, as companies use their cash reserves for survival rather than correcting supplier issues.
Manufacturing in particular has seen credit terms and payment adherence being significantly stretched in 2020, and this will undoubtedly lead to a further tightening of the supply chain going into 2021. What these businesses really need to do is prepare for worse to come, and the key will be identifying solutions that provide longer-term improvement that can be implemented quickly.
There are five main credit rating agencies in the UK and all LLP’s and Limited companies are rated using their respective algorithms. The scoring methodology for each agency is different, but all utilise data from Companies House, alongside payment data collected to evaluate how suppliers are paid against agreed credit terms.
It is during this process that a specific issue can occur for businesses, where the time lag of filing their annual accounts has a negative impact on their ratings and limits in the meantime. Add to this the general uncertainty around what to do about bad credit terms, the threat of sector downgrades and auditors flagging concerns with working capital statements, and the picture can seem bleak.
Every business is different, and the way that their credit is repaired will need to be different, but they are united by one common thing. Repairing business credit ratings could be the key to helping them survive and thrive in this difficult trading climate regardless of whether they are SMEs, PLCs, or anything in between.
By acting now, businesses can put themselves in a better position to proactively observe and manage their ratings going forward, maximising their financial capabilities.
With an improved credit rating, businesses can really unlock their full potential, which is now more important than ever.
James Piper, Managing Director of Lightbulb Credit
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