When seeking a loan or on the verge of striking a deal with a new supplier, a poor credit score can have a detrimental effect on a business’s fortunes. Whilst the complex calculations are beyond the understanding and control of human beings, a nice solid score is all the more likely if a handful of key boxes are ticked. So, what are these boxes and how can the entrepreneur go about ticking them?
Keep your own house in order
As is common with younger enterprises, a business credit rating will to a large extent be based on the owner’s personal circumstances. Therefore, a favourable set of bank accounts and credit card records should stand the entrepreneur in fairly good stead. “Owners of small or newly formed businesses should keep an eye on their own personal finances,” stresses Ade Potts, managing director of SME business at Experian, the credit reference agency. “If financial data on a business is scarce, their personal data may be used to gauge the financial health of the company.” Needless to say, there are a number of things to look out for on this front. “It means no CCJs, paying your bills on time, being on the electoral roll at your home address and having a good income,” comments Aidan Halliday, sales director at 4most Europe, the credit risk consultancy.
Pay on time
Transactions between companies don’t generally have a place in the complex systems that calculate credit scores. However, a handful of web-based services have sprung up in recent years that allow companies to report others for late payment and other misdemeanours. As a result, creditors have been granted access to information that has not previously been public but, more importantly, data that can also impact a firm’s chances when it comes to securing credit. “Information that is available now isn’t as exclusively bank-related as it used to be,” says Mike Hartley, head of litigation and insolvency at ACI Legal, the legal services provider. As a result, the implications of not paying invoices on time have become somewhat more serious. Negotiating realistic payment terms is thus pretty crucial. “A deteriorating payment position is often a sign of financial distress,” explains Potts. “You need to make sure that late payment doesn’t affect how you are seen by others.”
Protect other interests
Regardless of the age or turnover of one’s current venture, the fate of a business owner’s other projects can have a significant effect on credit rating. “If we look at Joe Smith Ltd and the director is Joe Smith, we will also look at whether Joe Smith has directorships of any other companies, past or present,” says Hartley. “If those companies are performing well, then it is going to boost the credit rating of his current company but if he has had historic involvement in liquidated companies, then that information is going to be available to creditors.” Hartley suggests therefore that liquidation should always be the last resort. “If it can be shown that somebody has taken active steps to manage a problem rather than walk away from it, it’s going to boost their credit rating and the credit rating of any companies that they are associated with going forward,” he concludes.
Hire an FD
Whilst it’s probably sound advice for any money-related matter, acquiring the services of a quality finance director is a decent first step to a solid credit rating. Of course, simply having an FD in place won’t necessarily guarantee a high score, but they will at least know how to steady the ship and offer a solid financial picture when it matters most. “I can’t say that Dun & Bradstreet has points in its system that says if there is an FD on board, it is a better business, nor can I say if there is an FD on board, that they don’t take account of it,” says Malcom Durham, chairman of FD Solutions. “What I can say is that a proper FD who is actually worthy of the title will know by looking at the accounts what impression they give to others and will also know how to present the best impression and improve the situation of the business over time.”
Don’t annoy your bank manager
Striking up a strong rapport with the person that may have already provided an all-important loan or overdraft isn’t the worst idea in the world – especially if things go awry. After all, a bit of honesty always goes a long way; doesn’t it? “Relationships are absolutely crucial. Rather than fall behind with payments to a bank or finance institution, at the first sign of any problems, you should get in touch with your business manager or relationship manager,” says Hartley. “They are key to protecting your credit rating. They can intervene quickly and prevent adverse information being recorded. Problems occur when people bury their head in the sand and if they are in any doubt whatsoever, they should seek specialist advice.”