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Credit Management

Over 1.9 million SMEs have limited awareness of how to safeguard their access to credit

By CreditMan Friday, September 26, 2014

As focus on lending to small businesses gains momentum with government schemes like Funding for Lending, many decision makers within the UK’s SME sector may be unknowingly harming their chances of securing finance and growth for the future. This is according to new research from Experian®, the global information services company.

The findings come as Experian launches its SME Reputation Index, a survey of over 500 financial decision makers in SMEs across the UK. The Index reveals attitudes towards safeguarding financial reputation.

One of the key findings from the Index is that only one in eight (13 per cent) of UK SME financial decision makers have complete awareness of the key factors that could influence their credit score both positively and negatively, highlighting that over 1.9 million SME businesses (87 per cent) have only limited awareness of how to safeguard their credit rating.

The research has also revealed that only two in five decision makers (41 per cent) in SMEs have ever checked their business credit report. Micro businesses (those with one to nine employees) are the least likely to have checked their commercial credit report with only 39 per cent ever doing so.

Of those who have checked their report, around 44 per cent did this more than six months ago and curiosity was the main reason for performing a check rather than a desire to influence their access to credit.

Ade Potts, Managing Director of Experian’s SME business, said: “A business credit score forms a key part of the decision making process for lenders, service providers and many businesses. Whether a small business is applying for finance with a lender, credit with another business, competing for a supplier contact or simply trying to get a good deal on their business mobile contract, they need to understand that their business credit score will play a role. That is why it is vital that they understand what their credit score is saying about their business and also the things that can positively or negatively impact their credit score.”

Lack of awareness of the factors that impacts business scores

Two of the most common factors to impact credit scores negatively are a history of bankruptcy and numerous applications for credit accounts in a short time period. The research revealed that only 46 per cent of small business owners were aware that both of these factors had any negative impact on their commercial credit score.

Many SME owners have only partial awareness of factors affecting credit reports.

Around a third of UK SME financial decision makers (36 per cent) correctly identified one of the two scenarios that could impact their score negatively, but not both. More than seven in ten (72 per cent) respondents rightly acknowledged a history of bankruptcy whilst just over half (55 per cent) correctly identified that applying for numerous credit accounts in a short period could affect their scores negatively.
Many UK SMEs wrongly considered other factors as having a negative impact on their credit score. This included regularly using an overdraft (17 per cent), making employees redundant (9 per cent) and having more than five credit-card holders in the company (3 per cent).

Conversely, the Index also found that UK SMEs were even less aware of the factors that can have a positive impact on their commercial credit score. Two of the main factors that impact scores positively are prompt payment to suppliers and filing annual accounts on time.

Whilst comparatively four in five UK SME financial decision makers (78 per cent) correctly identify at least one factor that can have a positive impact, only one in five (22 per cent) correctly identify both. Prompt payment to suppliers was correctly cited by 59 per cent of respondents, whilst filing accounts was correctly referenced by only two in five UK SMEs (41 per cent).

Respondents incorrectly thought that a healthy bank balance (49 per cent), paying bills before due date (21 per cent), taking on more employees (5 per cent) and moving into bigger premises (2 per cent) would have a positive impact.

Small and medium sized businesses can find out more about what their business credit profile says about them and the steps they can take to help influence their score more positively through Experian’s new My Business Profile. For more information please visit: www.experian.co.uk/mybusinessprofile