Company Credit Guide
Credit Guide
Most people today take advantage of consumer credit for many of the things that we need. And even if we prefer to avoid credit and pay upfront with cash, most of us have at least one type of credit be it a mortgage, home equity loan, car loan, credit card or monthly instalment for appliances.
Managing your credit is important because with good credit you can get higher amounts of credit, lower interest rates and even sometimes less costly insurance. If you don't manage your credit it becomes more and more difficult to be extended credit, your credit history appears poor and it is easy to get into debt.
What is Credit Guide Scoring?
Credit scoring is a statistical method for assessing the credit risk of an individual or business. The credit guide gives an indication of the credit worthiness and likelihood that the loan will be paid back.
Credit guide scoring for individuals often looks at:
- Current level of indebtedness - having credit accounts and owing money does not necessarily mean you are a high risk borrower. However owing a lot of money on lots of different accounts can indicate that you are financially overstretched and could be likely to make late payments.
- Payment behaviour - this has a big impact on your credit score as they look at whether you have paid past credit accounts on time. A good payment history will positively impact your score.
- Length of credit history - a longer credit history often increases your score as it shows that you can successfully and responsibly manage your credit over time.
- How often credit is applied for - opening several credit accounts in a short period of time can represent a greater risk for lenders.
- Past delinquencies in repayment - continual late payments will negatively impact your credit score
In business and industry however, a different system is used to analyse the credit worthiness of the business. Many different credit reference agencies have their own systems for creating a credit guide, but the calculations for limited companies tend to include:
- Profitability
- Liquidity
- Debt serviceability
- Group structure
- Capital gearing
- Tangible Net Worth
- Working Capital
- Net Cash Flow from Operations
- Industry sector
- Age of company
- CCJs
- Company size
- Accounts irregularities
- Public information on winding up, insolvency or dissolution
The credit guide scoring is a very good indication of a company's credit worthiness. But the figures given in a credit report for the score and limit on a limited company should only be taken as credit guide and should not be the only basis for extending credit.
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