More than half of UK firms had poor credit scores before recession hit

RESEARCH by one of the country’s leading credit risk management firms show that British business was ill prepared for the downturn long before the credit crunch.

According to Graydon UK the working capital and financing challenges currently being faced by UK firms cannot be blamed soley on the impact of the global economic downturn.

Analysis on the creditworthiness of all active UK incorporated companies, using Graydon’s normal credit scoring rules shows more than half (59%) of UK companies were allocated ‘high’ or ‘above normal risk’ ratings by Graydon UK when the recession hit.

In comparison, only 20% of the total companies surveyed were awarded ‘low risk’ ratings by Graydon.

This means that more than 1.3 million UK companies were judged to be at an
increased risk of falling into financial difficulty within a year.

As a result the majority of UK companies were already categorized as being more vulnerable to encountering financial difficulties leading to administration, receivership or liquidation before the economic slump.

Martin Williams, managing director, Graydon UK, said: “UK consumers weren’t
the only ones to be swept along by the tide of credit available during the
years of sustained economic growth.

“Companies were drawn in too and a willingness to embrace debt when credit was easily obtainable, combined with persistent UK culture of the late payment of trade invoices by larger organisations, meant that many small firms were not well positioned to deal with the credit crunch when it came.”

He added that as a consequence inadequate working capital positions and high borrowing ratios were seen far too commonly in the credit profiles of many UK companies.

“History shows that businesses soon get into trouble when cash flow and finance dry up,” he said.

Graydon warns that the percentage of ‘high risk’ businesses will increase
further in the coming months, fuelled by an increase in County Court Judgments and a slowdown in trading.

It is urging firms to take practical measure to increase business credit scores.

Mr Williams said: “Current Government regulations stipulate that UK businesses’ statutory accounts covering what is likely to be the most severe reversal in UK economic growth, between mid-2008 and throughout 2009, will only start appearing at Companies House from late 2010 onwards.

“This means that as businesses start to pull out of the recession in 2010 and 2011, they may be saddled with poor credit ratings influenced by 2008 and 2009 financial performances, which may hinder their efforts to capitalize upon the business growth opportunities presented as confidence returns amidst the recovery.

“UK firms must pre-empt this issues by ensuring they volunteer up-to-date management account information to their banks and credit agencies as soon
as they can, to help improve their credit scores. The rallying call must be to get in there early, as delaying could create even bigger problems in the longer-term.”