You just wouldn’t credit it
How credit ratings affect you
An investigation has highlighted huge disparities in UK credit agencies’ ratings which, warn accountants, is hampering growth for Britain’s small and medium-sized enterprises. Could your business be affected? Leslie Berry reports
Hundreds of thousands of UK businesses daily rely on credit rating agencies to secure sufficient credit ratings and limits that will allow them to finance and grow their business.
Getting the correct limit or rating in this economic environment is crucial, as companies have to prove their viability to investors, suppliers and the banks.
Many businesses also rely heavily on credit ratings to decide whether and on what scale to transact business with other companies.
But a recent investigation carried out by accountants and business advisers Shelley Stock Hutter (SSH) showed up widely different credit ratings and credit limits recommended for the same businesses.
The firm, which carried out an analysis of 100 private companies’ credit reports in December 2014, found Dun and Bradstreet (D&B), Experian and Creditsafe recommend vastly different credit limits for the same businesses.
And the difference between the highest and lowest average rating of the three agencies for the 100 companies was 150%.
Dramatic differences
The latest investigation follows on from previous research carried out by the accountants on the same 100 firms during November 2011.
Excerpts from the December 2014 investigation include:
- Company 1 had three credit limits which ranged from £1.5m to £4.9m;
- Company 76 ranged from 0 to £18k with a rating of 4/100 to 83/100;
- Company 6: the limits between 2011 and 2014 by two agencies were reduced, while one increased theirs dramatically despite all relying on the same information.
Bobby Lane, a partner at SSH who oversaw both investigations, comments: ‘Three years on and still there is no change.
‘We raised a warning signal back in November 2011 and had hoped that the credit rating agencies would work together to provide greater transparency and put an end to these inconsistent credit ratings.
‘The latest findings clearly show that hundreds of thousands – and possibly millions of businesses –are still at risk of what continues to be the credit rating lottery.
‘Every government has continually referred to UK small to medium-sized enterprises (SME) as the lifeblood of the economy; however, these huge variations can seriously jeopardise their ability to trade.
‘On the one hand, an incorrect rating will affect their ability to gain credit from suppliers and raise finance.
‘In addition, it could deter companies from growing by avoiding trading or offering terms to potential customers that are creditworthy. If a business trades with a customer on the basis of an incorrect rating and it goes wrong, there could be potentially catastrophic consequences.
Different methods
‘Many small businesses are unaware that credit agencies use different methods to decide on ratings and limits. But it is not all their fault. The calculations are based on publicly available information such as abbreviated accounts, which give little information.
‘The more information that is available in the public domain, the more information there is to make an assessment. So to improve their chances of a correct rating, businesses should not be afraid to provide more detailed information.’
His firm, which has a portfolio of private doctor clients, is urging any SME concerned about its credit rating to approach credit agencies with explanations of the issues affecting their business and the trends in their numbers.
Then, it says, the credit agencies can gain a much better understanding of the position of their business and give a fairer result.
SSH believes businesses must also be aware of the lottery and assess the effect on their business of the relationship and use these limits and ratings as part of a more detailed ‘due diligence’ exercise on their customers.
Mr Lane argues that credit agencies must be prepared to show how they arrive at their recommendations and he wants to see guidelines drawn up to show the factors that could affect a business’s rating.
Implications of inconsistent ratings
SSH partner Bobby Lane (left) told Independent Practitioner Today: ‘The results of our research have serious implications for businesses and professionals across all sectors.
‘For those practitioners who extend credit to corporate clients or patients, relying solely on a credit rating or limit provided by one of the agencies could have significant and possible catastrophic implications should that rating or limit be incorrect.
‘Furthermore, it could restrict a practice from taking on new patients.
‘Of more concern is the ratings or limits being supplied by agencies on practices. Most wrongly assume that this will have no effect on them.
‘If you are looking to expand, refinance or lease new equipment, then a bank will be obtaining a limit or rating on your practice. If they go to an agency that has given you a bad limit, you may well be declined the finance needed to grow the practice.
‘Also, your suppliers from medical suppliers to your landlord may well obtain a limit or rating on your practice before extending you credit. If they get a bad result, they could well refuse to provide any credit terms. This will have huge implications for the cash flow of the practice.
‘The key is to ensure you know what the agencies are saying about your practice. Do your research.
‘If you do not like what you see, then do something about it and approach the relevant agency with more information to enable them to provide the correct result that will help you to not only manage the practice’s finance but potentially unblock any barriers to financing its growth.’
- See ‘A hire purpose‘