Why is your credit rating important?

Consider why people want to deal with you, quality, size, market standing? Directors are now starting to see that there are better intangible associations to have; a good credit rating is one of them.

Some companies think that if they spend all the money they earn each year then they won't have to pay the taxman as much, however, an attitude like this doesn't help and may have several negative effects.

Firstly, most companies with any sense will vet you as a new buyer and if you look to be a bit short on the old cash flow (working capital) then they may either restrict your credit period, impose a smaller credit limit on you or bump up the sale price to compensate for the fact that you may become a bad debt (so basically what they are doing is building up a bad debt reserve against you) or maybe they will want cash up front. - The main problem is that you probably won't realise, most companies aren't going to tell you that you are paying over the odds or only getting 30 days credit instead of 60 days credit, as it is not in their interest to do so.

This all has a negative affect as you are not allowing your capital to work for you and it is costing your company money as it puts more pressure on your bank overdraft or other borrowings and causes your own cash flow to slow down.

One area that is not helpful is that bad information spreads around the market very quickly, whereas good information has to be pushed - if your accounts are good - file them at Companies House early or send them to all the credit insurers and credit agencies, don't wait until the last possible moment.

If they are just OK, consider sending them to most of the Credit Insurers and Credit Vetting Agencies with a covering letter highlighting the better points and explaining away the not so good points - this is particularly important if you do not have to file full accounts - remember that an underwriter or analyst can only make assumptions based on what he sees written in the accounts, if your turnover drops because you have vetted out the high risk buyers and are concentrating on the more profitable accounts, then tell everyone this otherwise they will just see a fall in turnover and may assume that you are losing your share of the market or that there are other problems.

Always review all your purchases at least once a year - loyalty to one supplier is an admirable quality, however, some companies pay way too much for some products and services just because they don't review the market at least once a year.

Also, use a Consultant or Broker for specialist areas - finance, insurance, etc - they can save you money as well time searching the market and can more often than not get you a better price - I can give you plenty of examples.
Do you remember about 5 years ago all the fuss with high street banks & building societies - they were offering new investors a good rate of interest, yet those investors who had been with them years were getting an old rate, this is the same with credit insurance and company finance, the rate changes from year to year and the only time you see a difference is when they put the rate up globally not down. I had exactly the same with my car insurance recently, I reviewed the market, found a quote nearly 20% cheaper and then my current provider matched it (although there is more to a policy than just price, don't just change for the cheapest unless it covers you fully).

Another twist in the tale is that if you have a good credit rating then companies will "want" to sell to you – this is a good thing as it means that you can negotiate a better price or better credit, they want and need you, not the other way round. Obviously don't just ring up all your suppliers and ask for more credit as this may send out a false warning signal that you are struggling, instead, remind them of your good trading relationship and maybe that your accounts are stronger than last years, plus you may be in negotiation for a large contract that itself requires 60 days payment terms, use your good payment history with them to improve what you are offered.

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