There are two little known facts about business credit scores, the first is how much they can change within a 12-month period, and the second is how quickly even a slight drop in score can start to impact on day-to-day operations. It’s very common for problems with credit ratings to creep up announced, usually only surfacing when a business is prevented from doing something as a result.
Lightbulb Credit was formed in October 2017 by James Piper and started trading in April of 2018. James’s background and qualification as accorporate treasurer meant he had worked with cash flows, trade credit agencies, and banks for over 20 years.
Lightbulb Credit is the UK’s first business credit improvement service that uses a tried and tested method that gets results in just a few days. To date we have helped over 500 companies and added over £1bn to our clients’ trade credit terms. We work closely with the five main credit rating agencies to spot potential issues and take action quickly. Our service is completely risk-free, as the client only pays if we get results.
The UK trade credit market
There are five main credit rating agencies in the UK and all LLP’s and Limited companies are rated using their respective algorithms. The scoring methodology for each agency is different, but all utilise data from Companies House, alongside payment data collected to evaluate how suppliers are paid against agreed credit terms.
It is during this process that a specific issue can occur for businesses, where the time lag of filing their annual accounts can mean that their scores don’t always reflect the current strength and success of the business. Add to this the general uncertainty around what to do about bad credit terms and the threat of sector downgrades post COVID-19 – the picture can seem bleak.
Why this is important now
Many construction companies in the UK saw their credit scores and limits plummet at the end of 2020, causing them to miss out on millions in trade credit and restricting business growth when they needed it most. Poor credit ratings can impact directly on borrowing, trade credit, working capital and more crucially for the construction sector, tendering opportunities.
Construction is one of the few sectors experiencing a boom coming out of the pandemic, but as firms try to scale up and exploit this opportunity, they are suddenly finding their damaged credit ratings holding them back.
The construction sector is working capital intensive and having poor ratings can seriously hinder your ability to purchase stock and raw materials. It can also negatively impact supplier terms and relationships; all critical factors in running a successful construction business.
No one really talks about the benefits of improving business credit ratings in the UK. It’s well known that they are linked to interest rates on loans, but public sector organisations also use them as a key indicator of financial stability when selecting contractors/suppliers for new project tenders – something all construction firms should be aware of.
Whether you are a small, medium or large sized construction business, credit ratings can be a real strength or an absolute weakness of your business. In this sector ratings can be low for a number of different reasons;
- Limited accounting data filed
- Late invoice payments during the COVID-19 lockdown
- Deferral of accounts in 2020
- Director changes
- Audit partner comments & material uncertainty statements
Why credit ratings are important in construction
Ratings are used to show a company’s creditworthiness for providing goods/services on credit terms, for funding and also for tendering processes. An optimised credit rating can enhance these opportunities and have an instant positive impact on working capital.
For the construction industry specifically, the ability to meet minimum hurdle rates for tenders and new contracts is critical. Ratings are used by contract awarding bodies as part of their due diligence in ensuring suppliers are in a strong position to see the project through. Having a poor credit rating may mean you don’t even make it to the shortlist and will also impact on your supplier terms and your ability to purchase stock and raw materials.
The construction sector is a volatile one, very focused on tendering and working capital intensive. At the same time, it is also a vital sector within the UK economy, employing thousands and driving significant revenue into many other connected supply chains.
For those operating in the construction sector, maintaining an awareness of ratings and understanding how they can help or hinder your growth can make all the difference. Reputation is important but doors can immediately close to new projects if the credit score isn’t there to back it up.
You can read more about Credit Ratings within the Construction Industry here.
Construction client case study
One of our construction clients has had great success utilising credit improvement strategically to fast-track sustainable business growth.
The business was formed by two senior professionals from the construction industry with more than 45 years of experience between them. Reputationally the business was credible and trusted within the construction industry, but as a new enterprise their company credit ratings were holding them back.
Their biggest issue was tendering for work, in particular with Housing Associations. Despite showing impressive growth and stability in their first few years they were frustrated at not meeting the criteria for tenders. With very low credit ratings and limits the credit agencies had categorised them as high risk, preventing them from making the shortlist for tenders, all as a direct result of having limited accounting data filed at Companies House.
By submitting fresh data to the credit agencies that better reflected their financial position at that time, we were able to get their ratings reviewed. As a direct result of the new information shared, the first agency increased their rating from 17/100 to 47/100 and credit limit from £0 to £21,500, taking them from the high risk to the moderate risk category. The second agency amended their rating from 10/100 to 45/100 and credit limit from £0 to £48,000 moving them from the maximum to above average risk category.
These improvements enabled them to immediately tender for and win several multi-million-pound contracts with housing associations, increasing the value of their contracted work five-fold in just 3 years. A great example of how credit improvement can be the catalyst needed for change and growth.
The credit improvement solution
For many companies, business credit ratings are still very much an unknown quantity and there is a general assumption that they cannot be changed. Regardless of the size of a business, the principles of optimising these ratings are the same, and with a better understanding of them, you can start to proactively leverage them to your advantage.
At the moment there are more credit searches going through than ever, as suppliers and lenders remain cautious about the challenging economic backdrop, meaning many more firms are likely to be affected by a sudden drop in ratings.
Credit improvement can be done at any time and the insight provided as part of the process provides a totally new perspective on how a company is viewed externally, something that is invaluable to any business.
It can also be used in a timely way to coincide with planned business activities:
- Prior to applying for funding/investment to maximise the value achieved
- Before tender bids to ensure you meet the minimum hurdle rate
- To improve supplier terms post pandemic
- To release working capital to support growth
The results for each client are different, but the benefits to our construction clients have been consistent. A better credit score generates a healthier credit limit, improved rates of finance and more chance of gaining access to lucrative public sector work. And at this time, all construction businesses will be looking at how they can achieve these goals.
Sign up for a free trial of Lightbulb Credit’s monitoring service here
Lightbulb have continued to support this construction firm with their growth journey, and more recently assisted them with the specific objective of maintaining their ratings in preparation for transitioning to become an Employee-Owned Trust.
By keeping a close eye on their credit profile, and proactively intervening where necessary to ensure ratings and limits were maintained, the value of the business was fully maximised, and they now have a new company structure that better supports their future growth potential.
Get your FREE company credit insight report from Lightbulb Credit here
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1. Join our Facebook Group which built completely for businesses within the construction industry. Real people, real support. - Now also available on LinkedIn.
2. Keep up to date with Construction Insider Providing you with industry insight, tips & tricks and much more to make sure you are ahead of your competitors!
3. When you are ready, Become a Saint Financial Group client, and we will provide you with the highest quality solutions to effectively scale your construction business. Book your meeting here!
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