Credit where credit is (not necessarily) due

Credit where credit is (not necessarily) due

by Colin Sanders

What is an SME? We hear the term over and over again, sometimes as much as the dreaded word ‘Brexit’. What does that actually mean? According to Companies House, a small business has a turnover of less than £6.5 Million and less than 50 staff. A medium sized business is defined as one that has sales of less than £25.9 Million and under 250 staff. Both qualify to file only modified / abridged accounts. No sales figures reported, pre-tax profits or dividends disclosed and no notes as to how a business funds itself, not in detail anyway. Companies that file accounts in this way make up more than 80% of accounts filings at Companies House.


Most Credit Reference Agencies (CRA’s), credit suppliers and lenders will utilise an auto scoring method to score companies and businesses. It’s the world we live in today, but this method of scoring is heavily weighted in relation to their last filed accounts. How accurately can an auto score reflect a business based on limited information? Could this restrict the amount of credit advanced? Quite probably. The CRA’s are not entirely to blame, it wasn’t’ their decision to implement rules regarding filing requirements, this was down to Companies House. The CRA’s would like nothing better than for all companies to file a full set of accounts - it would make their life a whole lot easier. Solely relying on just a balance sheet has its limitations in respect of information available and therefore the amount of credit available. It’s not rocket science.

A balance sheet purely shows the net effect of a trading period, not the pre-tax profit (or loss) and any dividends paid. And with no notes, it cannot be determined how a business is funding itself. Are there high levels of third party debt? Are directors / shareholders providing personal funds by way of loan accounts? These are simply just not shown in a modified set of accounts.

The FTSE reports on major corporates but we should not forget that SME’s make up the majority of businesses operating in the UK and the bulk of the UK economy, therefore providing the chancellor with the bulk of tax revenue. I would suggest it’s essential to help these companies get the best “score” possible based on complete information as opposed to abridged. This has relevance to start-up companies, particularly as they enter their second and third year of trading and file first and second year accounts. I’m not suggesting excessive lines of credit, just realistic ones.

Coming from a CRA background of 30 years I’ve witnessed at first hand the fallibilities of auto scoring increase over the last 15-20 years. Don’t get me wrong, auto scoring is essential in a fast-paced world we live in today and is here to stay but this must not be the be all and end all scenario.

How can this be rectified to accurately reflect a trading position of a company? Information is king, and you cannot have too much of it. This is where the skills of an underwriter / analyst come into play. Manual intervention has a big part to play as well. A skilled underwriter / analyst will look at many other factors other than just the latest filed accounts. The sector it operates in, management accounts, the background of the directors / shareholders, any adverse data, business plans and much, much more. No, based on an auto score may well be a no after manual intervention but it may also be a maybe, even a yes.

This has been the basis of Merchant Money’s approach and our success has been built upon these principals. We feel it’s a matter of course to try and assist a company, whereby there are short term cashflow issues or a business is looking to expand and grow.

As a footnote, Begbies Traynor have very recently reported that 472,183 companies were suffering “financial distress” at the end of June, a rise of 9% year-on-year. Sectors with the highest number of distressed businesses were support services (112,434), construction (60,208), real estate (42,254), telecoms (31,770) and general retailers (30,574).

What support are these companies getting from their traditional lenders and suppliers?