THE debate about business financing has reached an unpleasant standstill. Depending on who you listen to, banks are either refusing to lend, firms are too scared to borrow, or a hodge-podge of other factors is making one or the other do both or neither. It’s a mess.
What’s lost is an idea of the mechanics of business lending, and how you can ensure you’re able to borrow the right amount at the correct rate. Unfortunately, research by Shelley Stock Hutter, an accountancy firm, suggests this is easier said than done.
Bobby Lane, a partner at the firm, tested the credit ratings of a sample of his clients. By comparing the limits offered by three agencies, he unearthed a striking discrepancy. One firm in 2011, for example, was given limits of £5.6m, £400,000, and £850,000. Another was worth either £7,000, £290,000, or £100,000. Which is correct? Since credit algorithms are as complex as actuarial tables, it’s hard to say.
It may all sound academic, but the implications are serious. Most obviously, a lender may stay safe and use the lowest rating on offer – preventing access to funds, potentially in defiance of a company’s true financial situation. But it may also affect a firm’s relationship with clients or suppliers. If your credit rating is poor, you’ll have to pay cash on delivery for a factory order, for example – an inconvenience worth avoiding.
What’s the solution? Lane explains that agencies often judge credit worthiness on publicly-known information, like accounts filed at Companies House. But “many firms are nervous about disclosing all their financial details,” he says, so they only file abbreviated accounts. There is an argument for offering agencies your full management accounts to give them the complete picture of your company’s financial health. It could be better for this to come through a third party – your bank or accountant – to give the information more legitimacy.
But also make sure rating discrepancies aren’t hurting your dealings with clients or customers. It’s not always safe to rely on the figures offered to you. Due diligence is key.
Tom Welsh is business features editor at City A.M.