Keep a good credit rating to fend off the crunch

Written by Catherine Murray

Friday, 08 August 2008

Practical advice for SME’s on managing business finances to minimise risk.

Business information provider Equifax believes that it is more crucial than ever that SMEs, and especially sole traders and partnerships, focus on maintaining a good credit rating.

The economic downturn is taking its toll on businesses as Equifax reports a 10% increase in business failures in the second quarter of 2008, compared to the same period last year.

With a record number of new businesses started up in the 12 months up to the beginning of 2008, reported by the Department for Business, Enterprise and Regulatory Reform (BERR), it is important that SMEs manage their finance effectively during the credit crunch to ensure success.

“New lines of credit are already harder to find as both lenders and other businesses become increasingly selective about who they do business with,” says Nic Beishon, Head of Commercial Solutions for Equifax.

“This means all types of business – from the one man bands through to the larger limited companies - need to keep a close eye on their own financial status as well as that of both prospective customers and suppliers,” he adds.

The most recent Equifax Business Failures Report revealed a 5.8% increase in the number of failed businesses with a zero credit limit.

Companies checking on these organisations in the lead up to their insolvency would have seen this zero rating.

This should have provided them with an important warning to only trade based on receiving upfront payments, says Beishon.

Beishon stresses that SMEs are the most vulnerable organisations in the current tough economic climate.

“It’s crucial, therefore, that they do everything possible to ensure their own credit rating is kept as positive as possible – and this means making sure that none of their customers fall behind with payments. It only takes one customer going under to turn their own financial fortunes,” he warns.

“We also believe it’s important that suppliers are checked and monitored on an on-going basis too, in order for companies to ensure they have a good source of raw materials and services to support their own business. This factor often gets overlooked, yet it can have a huge impact on an already struggling business.”

Firms are urged therefore to take steps to manage their finances and minimise their risks.

Equifax encourages businesses to make initial checks on the financial status of prospective customers and suppliers in particular

Companies should set up ongoing monitoring of key customers and suppliers to ensure that they are aware of any significant changes that might affect their own fortunes.

The following brief guide from Equifax outlines practical steps on how to maintain a good business credit score and a low risk profile:

Pay bills on time, as businesses will be looking for early signs of difficulty
Monitor your own business credit profile
File accounts on time, as any delays looks like you may have something to hide
Avoid County Court Judgments, as any firm monitoring your status will view this as an early sign of financial trouble
Conduct credit checks on all new accounts
Implement data sharing systems to monitor customers for signs of financial stress
Look for early warning signs, such as prompt payers suddenly falling behind on payments
If you suspect a customer or supplier is in trouble, run a credit check and reassess your relationship if necessary
Set strict deadlines on accounts that are continually overdue. Don’t let unpaid invoices mount up
Conduct ongoing monitoring of all customers and key suppliers.
Beware customers who switch to new suppliers at the point they reach their credit limit with you. This is often a sign of problems looming.