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Demystifying Company Credit Ratings

Company credit ratings – typically an uninteresting topic that rarely comes up in conversation unless you happen to work for Dun & Bradstreet or Creditsafe.
Despite their unexciting nature, credit ratings are important, even though the way in which they’re calculated can seem like a mystery.

Your company credit rating plays a pivotal role in how your brand is perceived in the business world. And while they’re not the be-all and end-all, we've demystified how credit ratings are calculated and ways you can improve yours.

 

What is a company credit rating?

The ultimate goal of a credit rating is for a lender to assess a business when it applies for a capital loan.

Put simply, a company with a credit rating of A is considered highly likely to repay any loan it takes out. Conversely, a company with a credit rating of D is considered high risk, and therefore will be susceptible to higher interest rates, if their loan application is successful in the first place.

 

It’s not just interest

Company credit ratings are also useful for assessing potential customers or suppliers.

Having a critical supplier in your supply chain with a D or E credit rating is not good practice and if the company was to go into liquidation on short notice it could profoundly impact your business. That’s not ideal.

Equally desirable is to have a customer base with strong credit ratings, particularly if the company pays on 30 or 60-day credit terms, otherwise, you run the risk of finding yourself out of pocket. Even less ideal.

Experian suggests that your business credit score can influence whether a business chooses to work with you or not. We tend to agree.

 

What about businesses selling on marketplaces?

Most online marketplaces provide very little insight into the financial well-being of their sellers.

For buyers, particularly when shopping for high-value products or services, this can jeopardise a sale. Buyers may carry out their own due diligence only to never return.

Or, they opt for a larger multinational company, thinking they’re a safer bet.

Sellers on marketplaces are crying out for solutions that empower them to showcase their creditability and a way to benchmark themselves against larger multinationals.

Businesses that work hard to maintain a strong credit rating should shout about it from the rooftops and use it to their advantage when selling online.

Credit Rating of A – extremely low probability of defaulting.
Credit Rating of D – high probability of defaulting.

 

How do credit rating agencies (CRAs) score companies?

They start by analysing every company's filed accounts from public data sources (Companies House in the UK, or Better Business Bureau in the US) and run this through an algorithm to record the results against previous years' accounts.

This process is then supplemented with invoice tracking throughout the year and industry trends (for example, the hospitality sector was collectively impacted due to the pandemic).

For director disqualifications and CCJs (county court judgments), the same process occurs - tracking both from public data sources.

 

How do I improve my company credit rating?

1. File your accounts on time annually

As mentioned, this is the main source of information that defines your company credit rating.

2. Regularly check your credit

It’s impossible to address an issue if you don’t know the root of the problem in the first place. It’s important to check your credit score at least every three months – easy places to do this are Creditsafe, Experian and Equifax

3. Pay your bills and invoices on time

CRAs monitor millions of bills and invoices annually and will notice when they are not settled in full, in turn negatively impacting your credit score.

4. Avoid applying for multiple loans or credit applications

Every time you apply for a loan or multiple lines of credit a ‘hard check’ is done on your business. This sends out the wrong message to CRAs as it suggests you are in financial difficulty. A better way to do this is to ask for a quote preventing the need for a hard check.

5. Establish credit or prove a track record of paying credit

Sensibly using a company credit card is one way of doing this.

6. File your accounts on time every year with your local tax authorities

This is where CRAs analyse your company’s accounts and monitor against previous years alongside industry-specific economic trends.

As buyers - both corporate and consumer - put pressure on businesses to be more transparent, it’s important you address every aspect of your business. You never know when someone might look at your credit score.

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