Blog: Do you trust credit ratings?
Wednesday 26th Oct 2011
A recent survey carried out by a leading firm of accountants discovered that for many businesses the credit ratings and limits suggested (and that is a key word) by the agencies vary enormously. One business discovered that the limits varied from £108000 to £8400. That is a considerable variance of course but should this be damaging to that businesses relationship with suppliers and does this indicate that the credit agencies don’t know what their doing?
Should the variance be damaging to that businesses relationship with suppliers and does this indicate that the credit agencies don’t know what their doing?
The answer to both points is “no”
Firstly a supplier should only take the suggested limit as a guideline. For some businesses a £200k facility might be just a little bit too frightening to grant whereas for many a blue chip, that figure is neither here nor there.
Credit limits are relative to what you can seriously afford to extend. They cannot be seen in isolation.
The agencies will vary with their opinions. The cheaper reports of the market will simply apply ratios to the filed accounts and add in a few other factors (county court judgments etc) and produce a limit from that very narrow information. Some bigger agencies will look into the accounts in more depth and will look at ownership structures, accounts relative to market, payment record and general new items too. You pay for what you get
But even then there will be strong differences of opinion. One major agency is very cool on directors who have been associated with previously bankrupt companies but doe stake a relatively benign view of ownership. Another is very dismissive of “intangible assets”.
We will not make particular suggestions but we will say that for quality of ratings and international reach, a well known market leader is still the strongest player in the market. We would also suggest that the cheaper reports should only be used as the roughest guideline.
Ultimately the decision is yours and do remember that only a bad debt is worse than turning away perfectly good business because of a misinterpreted understanding of risk