Why a good credit rating is essential for small companies

With a 10% increase in business failures in the second quarter of 2008, Equifax believes it has never been more important for small companies to maintain a good credit rating - especially sole traders and partnerships. With this in mind, the credit agency has provided the following essential tips to maintain a good business credit score and a low risk profile:

Top tips to maintain a good business credit score

• Pay bills on time, as businesses will be looking for early signs of difficulty
• Monitor your own business credit profile
• File accounts on time, as any delays looks like you may have something to hide
• Avoid County Court Judgments, as any firm monitoring your status will view this as an early sign of financial trouble
• Conduct credit checks on all new accounts
• Implement data sharing systems to monitor customers for signs of financial stress
• Look for early warning signs, such as prompt payers suddenly falling behind on payments
• If you suspect a customer or supplier is in trouble, run a credit check and reassess your relationship if necessary
• Set strict deadlines on accounts that are continually overdue. Don’t let unpaid invoices mount up
• Conduct ongoing monitoring of all customers and key suppliers. Equifax Portfolio Monitoring helps businesses quickly identify potential bad debt and act quickly to prevent it
• Beware customers who switch to new suppliers at the point they reach their credit limit with you. This is often a sign of problems looming.

Nic Beishon, from Equifax, confirmed:

“New lines of credit are already harder to find as both lenders and other businesses become increasingly selective about who they do business with. This means all types of business – from the one man bands through to the larger limited companies - need to keep a close eye on their own financial status as well as that of both prospective customers and suppliers.

"In our most recent Business Failures Report we saw a 5.8% increase in the number of failed businesses with a zero credit limit. Any company checking on these organisations in the lead up to their insolvency would have seen this zero rating, providing them with an important warning to only trade based on receiving upfront payments.

“In this tough economic climate SMEs are the most vulnerable. It’s crucial, therefore, that they do everything possible to ensure their own credit rating is kept as positive as possible – and this means making sure that none of their customers fall behind with payments. It only takes one customer going under to turn their own financial fortunes.

“We also believe it’s important that suppliers are checked and monitored on an on-going basis too, in order for companies to ensure they have a good source of raw materials and services to support their own business. This factor often gets overlooked, yet it can have a huge impact on an already struggling business.”