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What every construction business should know about credit ratings

What every construction business should know about credit ratings

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The coronavirus crisis has seen many businesses needing to adapt and approach their finances differently to survive and maintain growth. But there is also another way to improve business finances quickly that many companies are still unaware of – improving their credit ratings.

Many businesses don’t know or understand their credit ratings, and often don’t pay much attention to them until they have a problem. They also believe it’s a process that cannot be influenced, often accepting a poor rating and the consequences that brings.

How ratings impact business finance

For businesses, credit ratings have a direct impact on borrowing of any kind, trade terms, working capital and tendering. If a rating is low, it can have a negative influence on the rates and terms offered, or completely restrict access to funding altogether.

More importantly for construction firms, if your score doesn’t meet the minimum hurdle rate it can hinder your acceptance on tender bids, holding you back from winning new work.

The direct correlation between ratings and these key financial aspects of a business is not always recognised, and as a result many companies are missing out on future growth opportunities.

The Covid effect on ratings

The pandemic has also had a negative impact on ratings, with the resulting decline in revenue creating issues like reduced net worth, lower cash holding and deteriorating payment performance. All of these drag credit ratings down, reduce the chances of getting funding, and hurt businesses at a time when they need help the most.

Alongside that, more credit checks are being run than ever before and lenders are also applying tighter criteria to their offers, making it even more challenging for businesses to get the support they need.

What factors make up credit ratings?

There are six main credit rating agencies in the UK and all LLP’s and limited companies are rated using their algorithms. All utilise data from Companies House, alongside payment data collected to evaluate how suppliers are paid against agreed credit terms. This combined data is then used to determine a company score and generate a recommended credit limit.

Are all ratings agencies the same?

Each agency has its own unique algorithm and the scoring methodology they use is also different, and as a result disparity between agencies and ratings is not only uncommon, it’s the norm! Therefore, having visibility of your scores across the whole market is much more valuable than only checking scores with one agency.

What other factors can affect ratings?

There are other factors that can have an impact on ratings, even something as simple as a business having the wrong SIC code can throw a score out. More significant factors include things like CCJ’s, late invoice payments and the type of filing they choose to complete for Companies House.

For example, businesses turning over less than £10.2m can legally file exempt accounts, enabling them to file only a balance sheet rather than a full P&L. From an accounting point of view this is considered timesaving, but this simple action then makes it hard for the rating agencies to score them accurately due to the lack of public data available. 

When presented with a lack of data on a business, the agencies will always take the risk averse view, resulting in the company getting a lower score and credit limit applied. To maximise funding opportunities, it’s critical that the data available on a company reflects their current business performance before making the application.

How credit repair can help construction

Business credit repair is a relatively new concept in the UK and many business owners don’t realise that they can challenge a poor rating, or that it’s possible to get scores re-evaluated and improved quickly (often within 5 days) using real time data.

An increase in scores for construction firms can have an instant positive effect on both the short and long term aspects of their operation. In the short term it can help them to negotiate better credit terms with suppliers, strengthening their day-to-day supply chain and helping to manage the increasing price of materials. Long term it can enable them to secure funding and finance at more preferential rates to invest in their growth plans.

Credit repair can also be beneficial for newer firms who may be struggling with low scores and limits due to a lack of accounting data being filed. It is also a quick way to lift your score to ensure it meets the minimum hurdle rate for tenders, something that is critical for firms that are regularly bidding on large projects.

How credit repair works

The repair process begins with a free and detailed report from us showing data on your ratings and limits with the 5 main rating agencies (Creditsafe, Experian, Equifax, Graydon, Dun & Bradstreet) and the UK’s leading insolvency prediction tool Red Flag Alert. This insight alone is invaluable for any company that wants to learn more about how their business is viewed by others.

Next, we identify the specific actions needed to improve the ratings and propose a plan! If you’re happy to go ahead, we then collate some up-to-date information about your business and work directly with the agencies on your behalf to get scores re-evaluated.

Crucially there is no risk involved as the client only pays if the agreed results are achieved, so if there is no improvement there is no fee. 

👉 Get your free report here

Stay one step ahead with credit score monitoring

Once your scores are in a good place, maintaining a regular awareness of them can help keep your business on the front foot. With our credit score monitoring service, you’ll get notifications and expert support on any changes to your businesses credit profile with each of the 5 main UK credit rating agencies and insolvency data from Red Flag Alert. Plus, a monthly report summarising the business ratings, limits, search volumes and risk bandings, and how these have changed.

This can provide vital insight for construction firms who are often more sensitive to ratings changes, ensuring they can act quickly to prevent any issues affecting their business, and also helping them to make future plans around funding and growth.

We’re so confident about the value of this service that we offer a 90-day free trial, so you can try it out before you buy with no upfront payment commitment and no obligation to buy after the trial either.

👉 Sign up for the monitoring trial here

Take control of your company’s financial future in 2022

Through insight on your scores and taking action to improve them, you can take back control of your company finances and turn a negative situation around. 

Recovery and growth are the primary objectives for so many businesses this year, and at a time when many are facing great economic hardship, improving your credit ratings could be the key to securing the future of your business, and ensuring it thrives in 2022 and beyond.

To find out more contact james@lightbulbcredit.com 

This article was written for Construction Insider and Saint Financial Group. Saint is a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.

Saint provides the luxury of free business consultancy for all of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!

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Lightbulb Credit

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