Businesses often struggle to borrow because they haven’t done any preparation or management of their credit rating. In todays video I wanted to talk about how you can make sure you have a healthy rating going into the recession so you can borrow if you need to.
Prepare your business for the upcoming recession – Part 4: Credit Ratings
The thing about recessions is, quite often, it becomes a lot harder to actually borrow money. Why would you want to borrow money? If you have a big risk for your business, due to customers leaving or you’ve had to lower your prices, as an example, then you may have a cashflow hole. To do that you’re going to have to potentially borrow money or come up with some other kind of strategy. Assuming you’re going to borrow, what you need is decent credit ratings so people will actually lend your company money. The purpose of this video is get everyone to be proactive about their company’s credit rating; going into a recession, it will get harder to borrow. There’s more risks for the bank, so they’re going to be a lot slower and more difficult about lending. If you want that competitive edge, you’ve got to go into the recession with a credit rating that’s already prepared.
A couple of things you need to know about a company credit rating – it’s often being derived by movements in your balance sheet year on year. It’s quite often based on your file accounts at companies like Experian, what they do is they have a sort of computer that can go and read your accounts, and it can actually read the information in your accounts. Usually, abridged accounts, which don’t say a lot about your profits but they do say stuff about your balance sheet.
The other thing is, they look at how soon you file your accounts, if you’ve got late accounts. If you have county court judgements and other charges against your business, these credit rating agencies look at that. Based on what they see, they assign your company’s credit rating.
Why it’s important
Based on what was said, you’ve got to get your accounts in on time because that’s an easy one. So why throw away a credit rating because of that? The second one is if you do have county court judgements and you’re not sure how they’ve got there, you have to look into it and figure out how to reverse them. Looking at accounts in general, ask yourself: what is happening to my balance sheet year on year? What kind of picture does it paint? Are there assets growing or declining? Why is that? Did you take too much in dividends? Did you put through too many expenses that you didn’t necessarily need to in your accounts? Although that would be illegal, but if you were over zealous with the expenses that you claimed, did that push your business into a loss, which then would have made your company’s balance sheet look weaker?
If your answer is yes, then just think about being a bit more moderate in the way you spend money in your business. Going into a recession, you’ve got to make sure your credit rating is top notch. There’s a few things you can look at and a good accountant will also be able to guide you on that.
Obviously, one of the other biggest issues with credit ratings is when you’ve got customers with bad credit. You’ve got to start looking at the credit ratings of your customers, or at the very least have a look at their accounts and see what’s changing on their balance sheet year on year. If there’s a big negative number, then that should stick out. You can also have a look at when they are actually filing their accounts, because if it’s after the deadline, then maybe that’s not a particularly healthy business that you want to be working with. These issues can translate into your business because they’re not paying you on time, then that can be really dangerous for your own business, especially in the recession.