Accountants call for credit rating shake-up

Accountancy firm Shelley Stock Hutter called for greater transparency from small businesses and credit rating agencies following research which found “wide variations” in credit ratings and limits.  

The firm compared ratings from three agencies – Experian, Dun & Bradstreet and Creditsafe – and found vastly different recommendations for the same company due to a lack of uniform regulations and limited public information from business.
 
The research sampled 100 organisations and showed one company which received a £7,000 limit recommendation from D&B was approved for up to £290,000 by Experian. 
 
The credit agencies were also confused whether small businesses’ credit risks were improving or deteriorating; in one instance an agency offered vastly different credit limits to the same company over the two-year research samples. 
 
“This issue is really a double-edged sword,” said Bobby Lane from Shelley Stock Hutter. “The credit rating agencies are only able to provide suggested limits based on the information that they have available. 
 
Small businesses should investigate the limits being offered by the different agencies and approach them with up to date private management information if they are not consistent with the reality, Shelley Stock Hutter advised. Factors other than county court judgements and arrears that can affect credit ratings, such as amends to year-end date, should also be considered. 
 
Do you have any experiences of the credit-rating "lucky dip"? Please add your comments below to provide further evidence of the need for reform in this vital area of business finance.

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Comments

Credit ratings

The Rogue | | Permalink

I am not surprised at this.  We moved away from one of the providers in the survey because their ratings seemed so wild.  Companies with negative net worth were getting good ratings and companies with solid published accounts getting nil.  I know there is more to it than accounts but ratings still seemed ridiculous.  They also used payment information and based opinions on a very few instances of payment which I am sure could not be representative statistically.

Abbreviated Accounts

simonwwhitt | | Permalink

As was (briefly) mentioned in the article much of the reason for wildly differing ratings is the absence of any meaningful information when abbreviated accounts are filed.

Can anybody given me  a single good reason why small companies are allowed to file abbreviated accounts?

Credit rating

reynolds | | Permalink

having spent a silly amount of time today providing some commercial common sense to a clients supplier from a credit risk warning from cifs check (credit safe alternate view was 88 out of a 100), this from a company disclosing full accounts, I can fully appreciate this article.

Surely Vince Cables' proposal for small companies to be exempt filing even abbreviated accounts is a big step in the wrong direction - some information is better than none?  

ChrisMartin's picture

Spot on article

ChrisMartin | | Permalink

Credit ratings for the vast majority of UK businesses are quite clearly not much more scientific than "finger in the air" guesses. We've had several instances this year of healthy, stable client businesses being refused credit or having existing limits cut due to bizarre rating adjustments. When I challenged the agencies involved (big names) they all told me that their ratings were derived from "complex algorithms" but of course they wouldn't tell me what those involved. Less complex and more entirely made-up I would say - quite what they are using to change a client's credit rating materially three times in three consecutive months with not a single piece of new publicly available information I have no idea. No accounts, no CCJs, no credit applications, no credit searches - nothing.

It is both to their credit and their shame that all however offered some sort of credit score appeal process. For a fee of generally £250-ish + VAT I was allowed to present a case as to why they were wrong. Within a day, every score was put back to where it should have been (or at least where it was before). So much for their complex algorithms! Nice little earner though.   

Locutus's picture

Saddle up, we may be heading for the Wild West

Locutus | | Permalink

David Winch raised a point in "Any Answers" a couple of months back.

http://www.accountingweb.co.uk/anyanswers/question/government-simplification-needs-your-examination

If the Government's "simplification" sees the light of day, not only will abbreviated accounts be a thing of the past for micro entities, but they would instead be required to file a "statement of position" (something like a statement of assets and liabilities prepared on a cash basis) just 12 weeks after the year end.  The proposal seems to think the business owners will be able to easily extract this information from their accounting software.  OK if you have a decent bookkeeper, but plenty don't have that luxury.

It will be interesting to see what the credit reference agencies make of the information filed (if you can call it that).