Small firms still facing credit rating crisis

More than two million small businesses classified as above normal credit risk


More than two million small and medium-sized businesses are classed as an above normal credit risk to lenders, research has revealed.

Research conducted by credit referencing agency Graydon UK, which looked at three million small and medium-sized businesses, found that 62% were deemed to present an ‘above normal’ risk of defaulting on trade payments or running into financial difficulties.

A previous study by the agency, conducted in June, found that 60% of small and medium-sized firms were classified as either high risk or above normal risk, suggesting there has been little improvement in their perceived creditworthiness, Graydon said.

“Whatever the truth of the claims by the banks that they are continuing to lend to small firms, the fact remains that for many companies access to finance remains a real obstacle to ensuring a sustained recovery,” said Martin Williams, managing director of Graydon UK.

Williams said the crisis was being compounded by the shortage of information on small businesses that credit referencing agencies have to go on when making an assessment.

He said the government’s efforts to reduce red tape, by relaxing rules regarding the information that businesses have to file at Companies House each year, had actually made credit scoring far more difficult.

Williams added: “In an era of easy credit, the truth was that no one really noticed or cared much about the declining value of available information on businesses at Companies House caused by the introduction of audit thresholds and redefinitions of small, medium and large companies and their respective filing requirements.

“But come the credit crunch, banks, credit insurers and trade suppliers suddenly found themselves being forced to tighten lending and credit decisions, without access to financial account information they knew was up to date, verified and entirely trustworthy. This created a rush to find new data sources that would give the confidence to credit granters to underwrite risk in this changed environment.”

CreditPal, a free service launched by Graydon and Future Route, enables small and medium-sized businesses to submit their management accounts to a website, where they are validated and then sent on to credit agencies where they can positively affect the business’ credit score.

Williams added: “Small firms need to stop seeing credit scores as weapons used by large corporates against them, and see them instead as tools to help them gain credit and finance.”

© Crimson Business Ltd. 2009

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