Britain's SMEs in 'credit lottery'

A bad credit rating can stymie a business utterly. Either loans are refused outright or they come with exorbitant interest rates that make the local loan shark look like a charitable trust. Credit ratings can also determine whether your fellow firms will give you a line of credit; invaluable in certain industries like manufacturing and electronics. Terrifying then are new revelations that the top credit ratings agencies – namely Dun & Bradstreet, Experian, and Creditsafe – are all dishing out completely contradictory ratings to SMEs.

In 2010, one company’s ratings ran the whole spectrum from a credit limit of £25,000 to £85,000. In 2011, the disparities became even more pronounced: at the bottom end, a credit limit of £8,400 was put forward by one agency; a second suggested £108,000.

Bobby Lane, partner at Shelley Stock Hutter, says: ‘Many small businesses put their faith in credit agencies and perhaps unwittingly believe they are not only regulated but also assess companies using the same method. Clearly this isn’t the case.

‘Many businesses rely heavily on credit ratings to decide whether and on what scale to do business with other companies,’ he continues. ‘An overinflated rating can encourage a company to do business with another when the reality of their financial position is something quite different. If the relationship is significant to the business and it goes wrong this could be potentially catastrophic.’

Should there be more checks in place to ensure that the methods utilised by the credit ratings agencies are consistent, robust and fair? The whole sector seems as opaque as a pair of 200 denier stockings. However, a spokeswoman from Experian believes that the agency is doing all it can to keep customers in the loop. ‘We do publish details of where we find the data that informs the rating,’ she says. ‘We have always tried to be as transparent as possible.’

However, with many irrelevant or extraneous factors affecting ratings (changes to accounting reference dates, changes to the registered officers of a company, office moves, and a firm’s net assets or finance partners can all contribute to a negative rating), more needs to be done to bring ratings across the industry in line.

It’s tough enough to get credit in the current financial climate without an undeservedly poor rating muddying the waters. Phil McCabe of the Forum of Private Business (FPB) calls for a Government ‘code of transparency’ to force credit rating agencies to publish both their assessment criteria and ratings system. ‘This has been the untold story of the ongoing problems surrounding small business lending,’ he says.