News

October 28, 2011

Credit ratings for businesses “a lottery”, investigation finds

The credit ratings and limits offered by three leading agencies are so different from each other that getting an accurate credit score is a lottery for businesses, an investigation by accountants Shelley Stock Hutter LLP has found, writes Simon Wicks

After analysing the credit scores for 100 small and medium-sized businesses, the London-based chartered accountant found that credit limits recommended by three leading credit rating agencies (CRAs) – Experian, Creditsafe and Dun & Bradstreet (D&B) – vary by up to 150 per cent on average.

“We’ve got clients saying ‘We’re doing well’ but they can’t get a credit limit with suppliers; or they’re trying to contract as a supplier and they’re getting strange results,” said Shelley Stock Hutter partner Bobby Lane. “If all the agencies are relying on the same information, you would expect the same results. But you find one company increases a limit while another puts it down.”

Lane added: “We believe there should be a code of transparency or some kind of regulation to ensure consistency. This has a huge impact on businesses, but most don’t realise it’s even a problem.”

Shelley Stock Hutter conducted their research twice – in 2010 with 25 businesses and again in 2011 with the original 25 plus another 75. On both occasions, they found an average variation of 150 per cent in the scores offered by the three major CRAs. In one case, a business was given a credit limit of £7,000 by D&B and £290,000 by Experian, even though D&B gave the firm the better credit score.

CRAs will tend to use publicly available information such as data from Companies House and The Registry Trust to compile their scores. But they may also draw on other sources to refine their ratings and use different formulas to arrive at their ratings.

An Experian spokeswoman said: “Experian includes two other sets of unique data to provide a more comprehensive picture on the business and the people behind the business which will be reflected in a score.

“We include payment performance data, because it gives us a more timely and accurate indication of potential cashflow issues,” she added. “In addition, we also include consumer credit information on the person behind the business when there is very little data about the business itself.”

A Creditsafe spokesperson said: “No CRA will make every detail of their approach available externally, because it is their intellectual property and their competitive differentiator.

“We would always be interested in having more information available in order to provide yet deeper analysis,” she added. “However, as a first step we would encourage small businesses to always file full rather than abbreviated returns to Companies House on time. The more information that is available to CRAs, the more complete the picture.”