Managing your Credit Rating

Did you know that moving premises could affect your credit score? How? If you don’t report it swiftly to Companies House, announce it on social media sites or register it with relevant address directories, people will start wondering whether you’ve gone bust and asking questions about your company. And if someone else takes over your previous location, your credit score could get mixed up with theirs, which may not be good.

Everyone knows that a poor credit rating affects your chances of securing funding, but it’s not just for the banks that you need a good credit score. If you want credit from suppliers or to get the most advantageous deals on your telephones or your utilities, you need a good credit rating. So how can you get and keep one?

What you Can Do

Communicate with the credit agencies. Check the information they have on you and your business to make sure it is accurate. If not, get it fixed. Ask them for tips on how to raise your score if needed.

Make all business payments on time. If this is not possible, talk to the suppliers involved and try to negotiate new terms that you can stick to. Ask suppliers for their perception of your payment history, and share aspects that make you feel proud on a blog or on social media sites.

The Historical Aspect

Do you have a good entrepreneurial history? Credit agencies look at directors and business owners and what they have already been involved with. If you are new to the business world, you may be wise to get someone else on board who can provide a solid business history.

New Customers and Suppliers

Don’t get burnt by late paying customers. Before you issue credit, you should check the credit rating of any new ones. If they don’t pay you on time, it may affect your ability to pay your debts, so you get caught in the credit score downward spiral too.

If you go to new suppliers who want you to pay upfront, make sure they are creditworthy before you part with your money. If they go under before you got what you paid for, you could be left without the supplies you are expecting. You’ll have to fork out again if they are crucial to your business and you’ll still have to wait for them, possibly putting you in your customers’ bad books for not being able to deliver on time, and other suppliers’ if you don’t have the wherewithal to pay them on time.

Your outsourced bookkeepers have lots of contacts in the business world. Ask them to let you know what they’ve heard about you, and where you should take care before committing time and money.

What to Do About Late Payments

Many small enterprises in the business to business sector suffer cash flow problems because their customers do not honour their payment commitments at the time agreed. But Business Minister, Michael Fallon, believes that the majority don’t want new legislation regarding late payment because it could interfere with their business relationships. Instead he seeks ways of changing the late payment culture to make prompt payment the norm.

He is urging all FTSE 350 companies to sign up to the Institute of Credit Management's Prompt Payment Code.  The minister has announced that he will be publishing a list of those who don’t to name and shame them.

The Current Legal Options

You should not forget, though, that you already have legal options through the Late Payment of Commercial Debts (Interest) Act 1998. Under this, there is an understanding that, if no written or verbal agreement about payment terms has been made, the default period for a date that the debt is due will be 30 days from the date an invoice is received or a service is provided. After that period or whenever the debt was due according to a reasonable agreement, statutory interest may be charged on the debt, and the supplier is entitled to additional compensation.

For a variety of reasons, few small businesses choose to enforce this, even if they have to wait up to a scandalous six months for payments for supplies, services and expenses. Often this is because they fear that they will lose the late payer as a client, plus if word got around, it might jeopardise other business as well.

Reminding Customers of your Rights

It is still wise, however, to include a warning that you reserve the right to charge statutory interest on late payments when sending out documents such as quotations, order confirmations, invoices and statements. The statutory rate to quote is the Bank of England base rate at the time the debt falls due, plus 8%. This could be a deterrent for companies that tend to let payment dates slip.

It’s really important to stay on top of your credit control. Your outsourced bookkeepers will provide you with regular reports on this. If a customer hasn’t paid up on time, you would probably follow up with a letter or phone call, depending on the type of relationship you have with them.  It’s always a good idea to find out if there are any special circumstances around the missed payment if you can. Then you can choose to negotiate a new date or stepped payments if that seems appropriate, or you can remind them about your right to interest on what is due.

Taking Late Payers to Court

You may decide to stop doing business with persistent late payers and feel you have nothing to lose by making a claim against them. In that case you have the weight of the law on your side. You can claim for unpaid debts plus interest, and you can claim for the statutory interest on late payments during the six previous years.

Did you Fall into the Swap Trap?

In 2007, few people foresaw the drastic reduction of interest rates to come, including financial advisers. They were enthusiastic about swaps, the hedging products designed to protect business loans from interest rises. Some business funding from banks was conditional on having a swap attached.

This has turned into a bonanza for the banks, because when interest rates drop the swap customer has to pay the difference to the lender. These Interest Rate Swap Agreements (IRSAs) are also very costly to get out of, and that was often not explained to the customers before they signed them.

Losses can be Significant

One entrepreneur, who was persuaded to buy six IRSAs in 2007, says his total losses so far amount to £1.5 million and he is only still in business because the losses are spread among several enterprises and he still has one that is profitable. He maintains that break costs or other options were never mentioned before he purchased the swaps.

Swap Mis-selling Also Significant

This constitutes serious mis-selling because banks and their representatives, as well as independent financial advisers have a responsibility to point out all risks involved in any transaction, and to ensure that products are suitable for a customer before decisions are made. The FSA recently estimated that, of SMEs that purchased swaps, around 90% were mis-sold. Many have had to down-size their staff and their growth, or have even ceased to trade altogether.

Claiming Compensation

So the FSA has set up a scheme and ordered the major banks to sort out their small business swap customers and compensate them for their losses. If you have been a victim, have a total of up to 50 staff, with a turnover of not more than £6.5 million or a balance sheet of up to £3.26 million, and your lender is involved in this scheme, you can expect compensation. You should not have to involve a financial adviser, but you should not delay talking to the lender and asking what they will do about it and how soon. The Financial Service Ombudsman can also intervene in cases where compensation will not reach more than £150,000. To claim from lenders outside this scheme, you will most likely need to get legal support, so your claims will also need to cover your legal costs.

The first step is probably to work out the difference between what repayments you would have made if your loan had been free of the swap and what you actually paid. Your outsourced bookkeepers will be the best people to help you do this.