Credit ratings a ‘lucky dip’ for SMEs

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Businesses could be missing out on credit due to inconsistent scoring.

Major discrepancies in the way that SMEs are rated by credit agencies could prevent businesses securing the credit they merit, a new report has suggested.

An investigation carried out by accountancy firm Shelley Stock Hutter (SSH) has revealed “huge variations” in the way that financial judgments are cast over Britain’s five million SMEs.

It analysed credit reports from 100 SMEs and found that Dun & Bradstreet, Experian and Creditsafe recommended vastly different credit limits to the same businesses.

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SSH claims the differences in practices could jeopardise entrepreneurs’ ability to gain credit from suppliers and raise finance, arguing that many face a “lucky dip” when it comes to getting a credit rating.

In one case, a credit agency gave a company a zero credit limit, while a second credit agency gave the same company £6,000 and the third gave £68,000.

Bobby Lane, a partner at Shelley Stock Hutter, says the report raises the possibility that a company whose rating and limit is inconsistent with their performance might not be able to secure sufficient credit to grow their business.

On the flip side, discrepancies in credit ratings could prove harmful for anybody extending credit.

“Many businesses rely heavily on credit ratings to decide whether and on what scale to do business with other companies,” he said. “An overinflated rating can encourage a company to do business with another when the reality of their financial position is something quite different. If the relationship is significant to the business and it goes wrong this could be potentially catastrophic.”

SSH is now calling on the government to force agencies to be more open.

“It is understandable that different agencies use different methods for calculating the financial risk of lending to a company, but it is only fair that they publish their criteria,” said Lane. “There ought to be a code on transparency, drawn up by the Government if the agencies can’t agree on one themselves.”

 

 

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