Almost every business requires access to credit in one form or another. Whether it is to take on a lease, acquire equipment or buy in stock, credit greases the wheels of daily trading. And optometry is no different as the likes of optical finance companies Braemar Finance and Performance Finance prove.
The very nature of credit means that suppliers and lenders use a number of systems and processes to confirm that an applicant is able to make repayments. Just as an individual will be credit checked for, say, a new mobile phone contract or a car loan, so a business and its owners will be checked against its payment history while proving the entity is what it claims to be.
Since, for any practice, profit is the difference between revenue and cost it makes sense, therefore, that owners maintain the cleanest of records. But worryingly, not all recognise the link between borrowing and the credit check performed on their business.
Making the cut
Business generally have a credit score which indicates creditworthiness. Based on an analysis of publicly available information and that shared by financial institutions, a credit score helps lenders understand financial position of the borrower and level of repayment risk. Each credit reference agency, and there are three – Experian, Equifax and Transunion – uses a system akin to Experian’s which generates a score between 0 to 100, with 0 representing a high risk and 100 representing a low risk. Applicants that are good risks gain the access they need on the best possible terms, middling risks are burdened with terms that carry a higher level of cost, while poor risks either pay through the nose or are rejected outright.
The agencies use multiple information sources including Companies House, the official Gazettes, banks, card issuers, building societies, the electoral roll, and the court system where County Court Judgments are entered but not satisfied within 30 days of ruling or where there has been a bankruptcy.
This data is regularly combined with information already held by the agencies and analysed to generate a historical pattern of trading from which to build the score. It is this that lenders and suppliers tap into to determine what, if anything, they will grant on credit terms. And it is this that should motivate practices to want to maintain a clean sheet.
But what of firms with little to no financial or credit history – known in the credit world as ‘thin file’ businesses? For them, to gain acceptance, they will have to accept that the owner’s (or director’s) own personal credit scores may be used to make a determination.
Clearly, decisions can only be made on the information before the agencies. If it is believed to be inaccurate the data subject should make an effort to have it corrected by officially challenging the credit report – each of the credit reference agencies has a process for registering a dispute.
Multiple uses
Credit information has more than one use. While lenders and suppliers use it to determine who and on what terms they will supply, borrowers – a practice – can use it to protect their position by weeding out inaccurate data and to keep a lid on fraud committed in its name. Credit information can also be used by a practice that is closely aligned to a supplier to minimise the risk of another’s corporate failure leading to a damaging loss of supply (to patients). But consider also a practice that owns premises and wants to let out unused space to release cash; in today’s climate it would be sensible to check on the standing of a potential tenant. And with regard to employees, credit information can be used to check on new hires to ensure that they are genuine and again, who they say they are; it should not be forgotten that they have access to patient lists, the accounts system and the till.
Cost of service
Agencies maintain their own pricing structures for regular subscribers as well as for those that want ad hoc reports. Each has a number of services. Equifax, for example, offers products that verify age, bank accounts, documents and more. It is just a question of checking the options.
While reports are not free, they are not as expensive as might be thought. Experian’s Business Express checks on the status of others and costs from £25+VAT per month. Alternatively, to check a business’s own credit score, Experian offers My Business Profile for £24.99+VAT per month.
In summary
Credit information is now a permanent fixture of business life, but that’s not to say it’s a bad thing. Far from it, for those that play by the rules and keep a clean record will get the best of terms and increase the odds of being profitable.
- More information: experian.com; equifax.co.uk; and transunion.co.uk.
Cheap borrowing but be quick
The government has a number of programmes to help businesses cope with the effects of coronavirus. One such programme, the Bounce Back Loan (BBL), is one that almost every business should apply for – but they need to be quick as the door will close to new applicants on November 4, 2020.
BBLs are a governmental wonder. They offer qualifying businesses (there are a few exceptions) a six-year loan of up to 25% of turnover, with no arrangement fees, no personal guarantee, or anything other than a soft (non-record affecting) credit check. The first year is free of cost with no repayments; years two to six carry an interest rate of just 2.5%. The loan can be repaid at any time without penalty.
- Apply via gov.uk, searching for Bounce Back Loan.