In the current economic climate, where companies are more aware than ever of the risk of bad debt, it may pay to help your customers improve their credit worthiness, according to Philip King, chief executive of the Institute of Credit Managers.

It is widely accepted that the financial crisis of the past 18 months will change the way that business is conducted in the future, especially in relation to credit.

While it was encouraging that, at a company-to-company level, businesses still managed to extend credit to one another, this same ethos did not permeate down to the major lenders who, despite their protestations, appeared steadfastly to hang on to their cash rather than lend it, in order to repair their balance sheets.

Although the economy is now officially out of recession, what might be termed ‘the real economy’ is still struggling significantly, and recovery is fragile at best. What is most alarming is that there will be a residual impact on business and especially business confidence, as the full extent of the crisis is revealed in black and white on the pages of companies’ annual reports. This in turn, will seriously impact credit.

Statutory information and accounts filed in the coming months are going to show deteriorating positions and trends for 2009 compared with previous years. This, in turn, will have a knock-on effect on limits that credit insurers are prepared to write and the credit ’scores’ calculated by various reference agencies.

Those credit managers that have previously relied upon, and trusted in, the efficacy of such information to make informed credit decisions, will find themselves in uncharted waters. The need for improved technical and analytical skills will be paramount in pricing and the management of risk.

Many within the credit industry have been calling for the greater sharing of financial information, with the loudest voices, perhaps, being among the credit insurance community.

But it is not just the insurers who will need more information to underwrite risk in the future; credit professionals themselves are going to have to demand more financial data from their customers in order to grant credit.

This shift in business culture – for a while at least – may sit uncomfortably with those who consider their financial information ‘private and confidential’. It will be essential, however, if they expect lines of credit to be kept open.

Of course, there are tools out there to help credit managers equip themselves for the challenges ahead. At the one level, there are training courses looking at the understanding of credit risk, company accounts, credit risk analysis, financial analysis, and business finance, all of which will be relevant moving forward.

At another, there are increasingly sophisticated financial ‘tools’ such as the recently launched CreditPal that will enable subscribers to access summarised management accounts and up-to-date credit recommendations for a company’s customers on a monthly basis.

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Chris Poll, chief executive officer of CreditPal’s parent company Future Route, speaks to AB magazine about the lessons he’s learnt, the tips he can give and why CreditPal and Validis are such essential tools for accountants and businesses.

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New research from CreditPal reveals that three quarters (77%) of SMEs were able to secure or extend existing credit from their suppliers in the last 24 months after sharing their management accounts with them.

They did so following requests from trade credit insurers who are increasingly demanding additional disclosure from the customers and suppliers of a business. The SMEs that have made their management accounts available for scrutiny were best placed to protect their position despite the difficult economic environment.

In the last 24 months a third (35%) of SMEs that supplied management accounts to suppliers, following requests by trade credit insurers were able to extend their credit terms. An additional 42% of SMEs in this position were able to keep their credit terms the same throughout the height of the recession by sharing their management accounts.

Chris Poll, CEO of CreditPal, commented: “Increasingly credit trade insurers are looking to source intimate financial information about their clients’ trading partners. Insurers and businesses are adopting new strategies for financial risk mitigation to ensure they minimise their exposure to bad debt and defaulted payment. Financial directors are increasingly coming under pressure to supply real time updates regarding a trading partner’s financial status to satisfy compliance requests from their credit trade insurer. Annual report data that could be over 18 months old filed at Companies House is no longer deemed sufficient. Transparency and openness are rapidly becoming the key buzz words in all areas of the SME accounting and finance sphere.”

Philip King, Chief Executive, Institute of Credit Management, said: “Trade credit insurance plays a vital role for SMEs in particular and it is clear that insurers will be more inclined to write cover and maintain limits given greater financial disclosure. Offering that disclosure will be of considerable benefit to both customers and suppliers.”

Over 47,000 small and medium sized businesses that refused requests to provide management accounts to a business partner or customer, to satisfy credit trade insurers’ compliance requests, found their credit facility was either cancelled or refused in the last two years. Over 670,000(2) businesses were requested to provide their management accounts to their suppliers for insurance purposes in the last 24 months.

Philip King continued: “Credit Managers, who keep the supply chain moving, also find CreditPal compelling: – Credit professionals have long demanded validated monthly management account information as a tool for pricing and managing risk. The availability of comprehensive information is vital to restoring confidence in assessing the financial risk of incorporated and unincorporated businesses. The availability of validated monthly data is an exciting innovation that will enable credit professionals to make better and more informed decisions.”

CreditPal recently conducted two surveys of UK businesses, one with YouGov and the other with the Forum of Private Business (FPB). They show that 68 percent of small and medium-sized enterprises (SMEs) now produce monthly management accounts to improve their own internal cash and financial management processes and only 17 per cent did so to meet the increased requirements from the finance and credit industry.

This is reflected in the fact that 96 per cent of the respondents improved their cash position through better controls rather than looking for outside financing. Pursuing late payers (76 per cent) heads the list, with placing tighter controls on ordering supplies (67 per cent) next, followed by internal cost-cutting (67 per cent) and then deferring payments to HMRC under the government’s ‘Time to Pay” scheme (25 per cent).

This is a considerable change over the past 18 months and is a reflection of two events: 50 per cent of UK businesses have lost money because either a supplier or customer defaulted; 80 per cent of UK businesses did not seek outside finance.

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Research published today by CreditPal shows that 43% of the UK’s Small and Medium Sized Enterprises (SMEs) applying for credit in the last two years were required to supply monthly management accounts by their lender.

The research reveals that even for the smallest businesses with a turnover under £1million, almost a third (29%) were asked for monthly management accounts to support their application for finance.

The proportion of companies being asked for this information varies radically between sectors, with 65% of manufacturing businesses being asked for monthly accounts, yet only 25% of retail enterprises were asked to supply them in support of their application. Despite widely reported difficulties in the construction industry, less than half of all credit requests from that sector required this supporting data. The findings appear to support the belief that companies are being scrutinised based on their sector classification, rather than being assessed on their individual performance.

Many SMEs are ill-equipped to provide the financial information now required by banks and building societies before they will consider extending finance. More than one in ten (15%) SMEs who were asked for monthly management accounts did not have them already available. Having these financial documents specially prepared meant these businesses incurred estimated cumulative charges of £50 million.

Chris Poll, CEO of CreditPal, commented: “The availability of credit is vital to help SMEs deliver growth for the UK economy. The concern many small enterprises have is that credit decisions are based primarily on their business sector, rather than by assessing their individual case. However, if lenders have access to the most up to date financial information they are able to assess and price credit more effectively.

“Our research indicates if businesses have validated monthly management accounts readily available they will receive decisions on their applications more quickly. Small business owners may think that monthly accounts are unnecessary, but the research indicates that lenders will demand greater transparency for even low levels of borrowing. While time spent preparing the accounts may be seen as a distraction from day to day operations, the benefit they bring in terms of management information, as well as helping facilitate access to credit could be invaluable. This is why we created CreditPal and made it free to UK business.”

Some say they are…..A lot say they aren’t….. but the debate as to whether banks are lending to SMEs during this ongoing economic crisis rumbles on.

There must be a whole load of reasons why some SMEs succeed in persuading banks that they are worth the punt, and then again, a number of reasons why banks turn down loan applications.

I was down in Westminster the other day talking to a Trade Credit insider at the government’s BIS department to learn of one big reason that prevents banks from lending. Apparently, from evidence that the banks have shown to BIS officials, its clear that many applications from SMEs are woefully inadequate. Which raises a big question in my mind…… are SMEs trying to obtain advice from accountants on how to pitch for a business loan i.e. what should a loan application be supported with (management accounts, cash flow forecast, breakeven analysis, yearly business plan?)

If SMEs aren’t asking for this advice from their financial advisers, they should be. Many business owners are good at what they do on a day to day basis when running their businesses, but pitching to a bank for a loan in this economic climate calls for a degree of expertise that I would guess sits outside the average SME owner’s comfort zone. Perhaps accountants should come forward a bit more to proactively market this type of service to the SME community, as clearly, there is a gap in the market that needs filling. Maybe some accountants are helping their small clients obtain bank support by offering advice on shaping a loan application. If you do, I’d like to hear from you because i reckon you’re the exception to the rule based on the evidence I can see.

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A growing number of small business owners are opting for personal insolvency in a desperate attempt to keep their company afloat, research shows.

Bosses have been using credit cards to finance their business and been prepared to pay the consequences when pressed by card companies to settle their accounts to protect their company.

Official figures recorded a sharp rise in personal insolvencies in the first nine months last year, masking what economists feel would have been a bigger increase in total business failures during the depths of the recession.

Full-year figures out on Friday will provide further insight into whether the trend has been maintained. In the third quarter alone, company liquidations were down almost 13pc at 4,716 on the corresponding period in 2008, while personal insolvencies jumped 28.2pc to 35,242.

The greater use of credit cards is just one of the alternative finance routes being used by small business owners as they struggle to raise bank finance on favourable terms. Loans from friends and family and asset sales have also made a contribution, with the result that over the last two years around £45bn has been raised by small companies from non-banking sources, according to data from CreditPal.

The “fear factor” has played a part in accelerating the switch from traditional bank and building society fund-raising avenues, researchers believe.

Chris Poll, chief executive of CreditPal, said: “Thousands of small and medium-sized enterprises (SME) have been forced to rely on credit to survive in the last two years as a result of disruptions to business cashflow.

“We believe we have identified an SME fear factor at play, with companies more likely to seek finance from non-traditional sources because they are scared of even applying for finance from banks and building societies.”

The CreditPal survey also showed that 15pc of the sample sacrificed family holidays in an effort to conserve cash. Pension funds have been raided in a small number of cases, while some business owners have pulled children out of private education in the search for economies and extra finance.

After surveying 10,000 of its members, the Federation of Small Businesses estimates that 41pc of them dipped into personal savings, 43pc used overdrafts and 21pc their credit card to stave off the recession.

Another survey, of 750 businesses by Graydon UK and the Forum of Private Business, showed 28pc of owners turning to friends, relatives and fellow directors for funding, while 8pc used personal credit cards.

In the second half of last year 40pc of companies failed to raise finance, with 52pc of them refused business loans and 38pc told they would not be given an extension on their overdraft facilities.

Business owners see little relief in sight this year, with almost a fifth citing access to finance as their biggest headache. The study suggests SMEs will need additional average funding of £113,731 this year, with 60pc of the total expected to come from banks.

Meanwhile, almost one-in-four businesses surveyed by Aviva UK Health said the economic struggle has had a lasting impact on employee stress levels, leading to a rise in long-term absence rates.

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Out of date credit information will threaten the survival of many small businesses and stifle the UK’s economic recovery, according to Graydon.

To tackle this growing problem a new joint venture between Graydon and Future Route – CreditPal – has been approved by the Federation of Small Businesses to ensure that supplier and lender decisions are based upon a company’s current financial performance.

The recession has increased lenders’ appetites for detailed evidence that firms are not going to default on their debts. But due to lenders’ reliance on historical data, a company’s financial viability is judged on its performance during the slump, irrespective of the gains it is currently making.

The CreditPal system allows companies to upload monthly management statements to the credit reference firm which can then be validated using Future Route’s pioneering Validis software. The FSB will now provide CreditPal as a benefit for its members.

By providing validated monthly management statements companies can access finance needed to keep them on track for growth.

Despite CreditPal allowing companies to improve their access to credit, some firms are still cautious about data sharing.Martin Williams, Graydon managing director said: “Firms are cautious about sharing their data with the tax man, or competitors – but they can now decide to allow just their suppliers view the information.”

Williams said that the system was now being used by major suppliers who were offering to raise clients’ credit scores for subscribing to the service.

CreditPal was approved by the FSB national committee on 27 January and Williams believes that it is likely to be unveiled at the FSB national conference in March.

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As a credit information man, I’m always trying to persuade businesses that good credit scores can directly impact their cash flow positions, so i was particularly pleased to hear yet more clear evidence yesterday from a bunch of credit managers as to how this can happen, in order to back up my perennial arguments on the subject.

Many credit departments nowadays are buying in software packages that help drive cash collection actions. Yesterday i heard from credit managers who allocate colour codes (green, amber , and red) to all existing credit accounts on their sales ledgers depending on the credit scores of their clients. If payments become overdue from a “green” client (one who has a good credit rating), some leeway is given before chasing up strenuously , whilst if payments are beyond due date from a “red” client, they’re chased immediately for the money. thus proving that companies with good credit scores can obtain extended credit far more easily than poor rated ones. if the “green” client has 15 or so more days in which to pay because the supplier has less concern about a bad debt arising, you can see how less pressure is brought to bear on his cash flow position, particularly if this was repeated many times over by different suppliers.


Companies should understand much more about how their credit ratings are produced by agencies like Graydon and D&B, and what they can do to try and improve their own credit ratings. As an industry, the credit reference fraternity is realising that its got to be more transparent about how it goes about its business, so expect some useful material on the subject coming into the market soon- that’s a promise!

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The importance of business credit ratings is an issue often referred to, but rarely addressed. For this reason, while many are keen to talk up the ‘green shoots of recovery’, little airtime is being given to a looming crisis that is awaiting businesses in 2010.

The credit crisis highlights the need for every business to assess the ability of their suppliers to supply or the ability of their customers to pay. Before either an order is given or one is taken, many businesses check their trading partner’s latest credit rating. The problem is that current Companies House filings reflect performance during the worst of the recession when many businesses experienced their worst trading performance ever, hampered by the increasing reluctance of banks to lend and suppliers to extend credit. Hard work has restored many businesses’ finances. Many are hoping to build on that progress in 2010.

This could be jeopardised just when recovery is in sight because Credit Referencing Agencies (CRAs) use statutory annual accounts filed at Companies House as an important part of their credit assessments. New credit ratings will be based on annual statutory accounts that reflect a business’s performance during the worst recession for a generation.

Professor Russel Griggs, chairman of the CBI’s UK SME national council, believes many remain unaware of this and therefore it is difficult to say how this scenario will play out. ‘I can’t predict what the full effects of this might be and I don’t think the finance and credit industry knows either,’ he says.

Griggs is quick to say that any sort of doomsday scenario is avoidable if all parties work together and SMEs and large corporates work alongside the credit and finance industries. ‘It is all about improving accountability and transparency and increasing information flow between trading partners. That’s not just the responsibility of businesses; the credit, finance and supply chain managers need to be communicating to their customers exactly what is required of them,’ he says. Martin Williams, managing director of credit referencing agency Graydon, agrees that everyone has a part to play. ‘It is our responsibility to make it clear to businesses exactly what information they need to supply in order to be properly assessed. However, it is also crucial that owners and managers move away from the mentality that regards all financial information about their businesses as private and confidential. They must embrace the idea that transparency of up-to date financial information can be a positive thing for both themselves
and for their suppliers and customers,’ he says.

Griggs agrees: ‘Businesses don’t have anything to fear about being more financially transparent as no one wants bad debtors or failures in supply. Survival – let alone growth – depends on better management of a business’s own finances and then to share this with their trading partners. This is very much a two-way exercise as, in turn, it is essential that every supplier and customer sees that business in the best possible light.’

‘Nervousness in the finance and credit markets can only continue,’ concludes Glenn Collins, head of advisory services, ACCA UK, ‘therefore now is the time for businesses to take control of their own credit ratings and also understand the credit ratings of those they do business with. Financial transparency of monthly management accounts will be crucial to achieving this and offset the negative impact of end-of-year accounts that reflect the poor trading year.’

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