Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Accountants call for credit rating shake-up

by
26th Oct 2011
Save content
Have you found this content useful? Use the button above to save it to your profile.

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 some companies due to a lack of uniform regulations and limited public information from business.
The research sampled 100 organisations and showed one company that 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 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. 
“The filing of abbreviated accounts will mean that only minimal information is available on the performance of a business or the reasons for the movements in net assets. In this instance an agency could not be blamed for assuming the worst case scenario. 
“We believe that the more information that is provided publicly or directly to the agencies - if they will accept it - the better. The credit rating will then be based on the up-to-date financial position of a business and potentially more reflective of their performance,” he said.
Limited business information is not the only reason for the recommended credit limit disparities. Lane explained that without a uniform set of agency rules or criteria, getting a credit rating is and will remain a “lucky dip” for businesses. 
“Surely the time will have to come where the agencies must be forced through a code of transparency to identify how they are arriving at their recommendations either through industry regulation or government initiatives,” he said. 
“This situation does not help the millions of businesses who in the current economic climate are having to prove their viability to investors, suppliers and banks on a daily basis.”
Speaking to The Telegraph, Phil McCabe of the Forum of Private Business confirmed the accountants’ findings: “This has been the untold story of the ongoing problems surrounding small business lending. It is also a serious supply chain risk.
“Companies will simply refuse to trade with firms based on flawed credit reports and some small businesses could be persuaded to trade with high risk organisations based on an overly generous score,” he said.
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.
Tags:

Replies (5)

Please login or register to join the discussion.

avatar
By The Rogue
28th Oct 2011 12:10

Credit ratings

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.

Thanks (0)
avatar
By simonwwhitt
28th Oct 2011 16:07

Abbreviated Accounts

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?

Thanks (0)
avatar
By reynolds
28th Oct 2011 17:21

Credit rating

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?  

Thanks (0)
By ChrisMartin
29th Oct 2011 10:56

Spot on article

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.   

Thanks (0)
Locutus of Borg
By Locutus
29th Oct 2011 18:15

Saddle up, we may be heading for the Wild West

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

https://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).

 

Thanks (0)