Honesty is the best credit policy

The world of credit ratings and risk scoring has fundamentally changed in recent times.

Larger channel organisations, such as trade distributors and credit insurers, have taken advantage of sophisticated scoring tools, and all scoring and rating mechanisms now depend on being fed with relevant risk data.

The commercial credit reference agencies produce scores to allow credit decisions to be made but, if the data is not available on a particular risk, the likelihood is that a negative rating may be produced.

Any rating system is only as good as the data fed into it, so it is important that all data is accurate. The reseller can ensure that this information is correct by providing it directly to the main credit agencies.

Positive news, such as new contracts, should be made public through firms' own websites, and also sent directly to rating agencies.

Resellers should consider a number of factors in order to achieve the highest possible credit rating. These include share equity in the business.

The amount of share capital is particularly important, as this is an indication of the owner's commitment to the business.

A large number of resellers have traditionally been under-capitalised and this has often resulted in a high-risk classification.

Working capital (the excess of current assets over current liabilities) is a measure of the funds available for conducting day-to-day business.

In the majority of cases poor or negative working capital will damage a firm's credit rating.

If possible VARs should try to avoid county court judgements. If a judgement is registered against your business, take action. If it is paid within 28 days it can be cancelled. If it is paid after 28 days it is satisfied. If no payment is made it can severely affect your credit rating.

Pay suppliers on time, as details of late payments will be reported to the credit insurance companies. It will invariably affect your credit rating.

The majority of organisations that extend credit to their customers will have some form of insurance.

Credit insurers such as Gerling NCM, Euler Trade Indemnity and Coface use credit ratings as part of their underwriting procedures. They obtain this information from endorsed credit agencies.

Most IT suppliers will use credit ratings in their risk-assessment procedures. So, if resellers are to obtain the credit they require, it is vital that their credit ratings reflect the true nature of their businesses.

Alan Norton is head of intelligence at Graydon.

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