Credit rating 'problems' for smaller businesses

30 June 2009

Well over a half of the UK’s smaller firms have credit ratings that could adversely affect their ability to raise finance.

That was the claim made by a leading credit risk management agency following its latest survey of the creditworthiness of SMEs.

Graydon UK used their credit scoring system to analyse three million SMEs and found that 60 per cent were assessed as high risk or above normal risk.

Only 13 per cent were ranked as low risk.

Martin Williams, the managing director of Graydon UK, said that the recession had had an obvious impact on the credit ratings of many small firms but added that just as much damage has been inflicted by the absence of relevant information on the financial performance of those businesses.

Mr Williams said: “This lack of data is known to damage companies’ credit scores just as it does with personal credit scoring.”

One of the problems is that credit scores are often determined by statutory filings of accounts at Companies House. These can often be up to 18 months out of date.

Insurers have been putting pressure on firms seeking trade credit insurance to supply their very latest accounts in order to make sure that the information submitted to Companies House still accurately reflects the financial health of the business.

Credit ratings agencies, too, have complained that rules which are intended to reduce the administrative burden on SMEs and which allow more firms than before to file abbreviated accounts has exacerbated the difficulties in properly assessing the risks posed by some businesses.

The present audit threshold is a turnover figure of £5.6 million, but that ceiling rises to £6.5 million for companies that have financial years beginning on or after 6 April 2008.

Mr Williams said: “The lack of up-to-date financial information is one of the main reasons companies have received poor credit scores and it’s something that the credit industry has fought against the government about.”

However, the demand by insurers for the latest management accounts has met with opposition from the business community.

The Federation of Small Businesses said that it is against increasing the administrational and financial burden on small firms, which would be the case if SMEs were asked to provide more information.

The business organisation added that “the majority of small businesses do not have to file their end of year figures at Companies House because their turnover is too small to require it”.