Bread, dough, moolah, dollar, cash—call it what you want—we all have a need for it. While the physical is clearly giving way to the digital, money, as a medium of exchange in whatever form, does make the world go around.
Any business that wants to borrow or buy on the best possible terms needs a five-star rating
The problem is that access can be restricted or carry a burdensome cost if the borrower is seen as risky. Take a mobile phone contract or an attempt to acquire a car on finance. We are credit checked and either approved, rejected or, depending on status, have it granted but on expensive terms. Credit checking available information, which is shared by financial organisations with credit reference agencies.
We know the process as individuals but not everyone appreciates that the same applies to businesses. Quite simply, any business—in this instance, aesthetic clinics—that wants to borrow or buy on the best possible terms needs a five-star rating.
Generating the facts
James McGarva, head of business information at Experian, defines a credit score as a ‘measure of creditworthiness, different factors to understand financial position and the level of financial risk’. This information, he says, ‘is combined to create a score, which influences whether companies are seen to be a repayment risk’.
Equifax's product manager, Andrew Fielder, holds a similar view, but adds that his company looks at data and represents the outcome as not just a score, but also ‘as an amount that a business may be seen as being ‘good for’ on typically a monthly basis’. A credit rating, he says, ‘aims to rank relative strengths of businesses against each other on a scale regardless of size, so a business that is scored 20 out of 100 is seen as less able to support credit than a business that scores 80 out of 100’.
Experian uses a similar methodology. It gives a credit score that can range from 0 to 100, with 0 representing a high risk and 100 representing a low risk. For example, 0 would be applied to a failed company, 26–50 to an above average business, while 91–100 is a very low-risk firm.
As McGarva outlines, ‘business information is generally held by a number of credit reference agencies and comes from multiple sources, including creditors, such as banks, credit card companies and building societies, or simply from publicly available records’.
It should be pointed out that the information gathering process is not underhand in any way. To illustrate this, Fielder explains that information credit reference agencies obtain information ‘from a wide variety of sources that include more well-known entities such as Companies House or the main Gazettes, as well as closed user group information on payment behaviour and newer data sources like Open Banking’.
McGarva says that this information is collated and includes data on existing business credit, such as current accounts, loans and credit card information, along with balances and amounts outstanding. On top of that is data on payment performance that, he says, ‘can offer real insight into a business's financial standing—and any potential problems they might be experiencing’. County Court Judgments (CCJs) and bankruptcies are, according to McGarva, ‘particularly significant to potential or existing suppliers and lenders. It can indicate severe financial difficulties and may well act as a red flag to those considering working with them.’ Companies House also holds records such as details on the directors, previous company names and annual returns.
» Credit reference agencies offer a variety of services to support a business dealing with a large volume of clients or suppliers «
Of course, it is entirely possible that a clinic can hunt down some of the information itself—the publicly available part that is. However, the benefit of using a credit reference agency follows, as Fielder notes, ‘from the fact that agencies will look at data in a number of ways, using aggregated data sources and applying analytical methodologies to build the score’. He continues, saying that ‘agencies use a database that has been built up over time to understand how businesses that were created historically have performed through an extended period’. He adds that scores may also incorporate personal data on company directors.
Making improvements
As noted earlier, whenever an application for credit is made, information on a credit report will be used along with other sources of information to determine whether a lender will agree to the request and on what terms.
This is why clinics, according to Fielder, should make every effort to maintain a good report, as it influences their ability to make purchases. It is worth noting, as he points out, that ‘business credit ratings are not as ubiquitous as personal credit ratings; however, they are more prevalent when dealing with larger purchases or lending decisions, such as for a loan or a business vehicle’.
It follows that a well-managed credit report will be seen by lenders as a positive. However, as McGarva details, ‘businesses with little to no financial history—known as ‘thin file’ businesses—may struggle to be accepted or get the best rates. In these circumstances, a business owner's or director's personal credit scores can be considered to help with the decision’.
Information in the world of credit is clearly everything. If it is suspected that information held is inaccurate or plainly wrong, steps should be taken to correct it. McGarva says that the only option is to dispute the business credit report by contacting the relevant credit reference agencies—not only can they correct data that can be shown to be inaccurate, but they also have services to review whole reports. Experian is a good example with its credit review service.
Credit information for suppliers
The wonder of information is that it invariably has more than one purpose. Just as a credit report allows a lender a window into the world of a (potential) borrower, so the process can be reversed by any business looking to check on its suppliers (and its clients).
McGarva makes the case here as being one of commercial survival as ‘any business can protect their revenue flow by running credit score reports on their customers to ensure they can pay for their services’. That said, clinics will generally require payment at the time of the work whether in cash, by card or credit instalment plan via a third party. However, if a clinic partners with another, a check could be of value.
Credit information can aid the fight against fraud, in that credit checking a business can confirm that contacts are who they say they are—and that their business is performing the way they say it is. For McGarva, ‘this kind of due diligence can save a lot of hassle and lost revenue down the line’.
Credit reference agencies offer a variety of services to support a business dealing with a large volume of clients or suppliers. Here, Fielder details that products to note include ‘services such as ad-hoc credit reports or the ability to use the data for account opening and account management’.
Of course, each agency will do something similar and more. For example, Equifax offers products to age verify, bank account verify, document verify and more. Clinics should hunt around.
Panel: How to improve a credit rating
- View your business credit report to understand the positive and negative factors in your history and plan the best path for progress
- Make a note of suppliers' payment terms and plan payments so they are on time. Poor payment performance can indicate a business struggling to service its debts
- File annual returns and financial accounts on time. Making more information on your business available helps suppliers, utility providers and lenders to understand it and make appropriate decisions
- Avoid County Court Judgments. Should one occur, settle it promptly
- Keep an eye on personal finances. Directors' personal credit scores can be taken into account for new businesses when little information is available
- Appoint a director with a strong history of running companies and a good credit score to help boost your company's standing
- Check and monitor the credit status of the companies you work with, so you can anticipate any supply chain problems before it affects the business.
The cost of protection
The costs associated with credit information are not as horrific as might be expected. McGarva reckons that Experian's Business Express, which costs from £25 per month, ‘has one of the most predictive scoring models in the industry and lets a business easily determine the creditworthiness of their business partners’. He asserts that it can help a business predict business credit risks and failures within the next 12 months.
Alternatively, where a business wants to check and improve its own business credit score, Experian has My Business Profile at a cost of £24.99 per month. ‘This,’ says McGarva, ‘enables a business owner or director to gain full visibility of their business credit profile, enabling them to understand what's affecting their company credit score’.
Granted, it is a cost, but for Fielder, credit ratings tell subscribers which companies are growing and which are shrinking, and that must be a benefit.
Summary
Like it or not, credit information exists and is here to stay. Whether it is to borrow or to seek terms with a supplier, having a whiter than white report is going to put a clinic head and shoulders above its rivals. Furthermore, with profit being a function of revenue less cost, anything that shaves off expense and risk has to be worth examining.