Company Credit Checks – What You Need to Know

Trading continues to be challenging for UK businesses. Debenhams, Intu and Arcadia are high-profile names that have all entered administration in 2020, and McColls in May 2022 with 16,000 jobs at risk.

The UK business environment continues to be a tough one. Rising costs and inflation are squeezing margins and many companies are struggling to make a profit. Unsurprisingly, this has led to insolvencies being at a record high and a spike in bad debt.

A company that experiences a bad debt is three times more likely to go insolvent themselves. This makes it imperative that companies do all they can to avoid offering any credit that may turn bad.

One of the most powerful ways a company can do this is by regularly performing company credit checks on any potential business partner.

In this article we will look at what a company credit check is and how they can be deployed.

If one of your customers goes insolvent while owing you money—through unpaid invoices for example—you will be very unlikely to get that money back. Learn how to find out if a company is insolvent.

Monitoring your customers’ business credit scores via company credit checks is one of the best ways to avoid losing money to customer insolvency.

What is a Company Credit Check

A company credit check is a report that summarises a company’s financial position and general information, to ultimately see if they are stable and if credit should be extended. Similar to a personal credit check, a credit rating is usually given but with a company credit check much more information is provided; this is usually in the form of a company report.

Company credit checks are performed through specialist platforms that pass data through complex algorithms to calculate if a company is creditworthy and would be able to pay back its debts. These algorithms vary significantly in how they calculate this and what they use to do so. Generally speaking, information such as financial information submitted to companies house, CCJs, gazette information and mortgage information are some of the factors used.

The purpose of a company credit check is to allow directors to make data driven informed business decisions and reduce the risk of doing business with a company that then goes insolvent.

What is a Company Credit Rating?

Company credit ratings differ from personal credit ratings in that they are not a universal score. Different business credit check providers will have different ratings and methods of presenting this. Many providers give a score out of 100 but Red Flag Alert have a unique rating system that puts companies in clearly defined categories of risk, to make it easier to interpret the financial stability of a company.

A company credit score indicates the likelihood of a company failing to pay invoices or meet other financial obligations. This likelihood is expressed as a risk score. 

A credit rating agency provides this via a company credit check. Credit rating agencies usually have databases of financial information that they use to calculate a company’s credit score. 

In many industries, a service provider will send an invoice once they have delivered the work. It usually takes at least 30 days for the customer to pay this invoice. During this time, the service provider has effectively provided them with credit. 

Businesses will check a client’s business credit score to assess whether extending credit to that customer is safe.

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Why perform company credit checks

As mentioned at the beginning of this article, UK businesses are struggling across the board. As profits decrease and the cost of doing business rises any unexpected loss can be enough to send a company into insolvency. In fact, businesses that suffer a bad debt are three times more likely to go insolvent themselves. Performing a credit check as part of due diligence proceedings highlights any potential risk of bad debts.

It is also important that companies have financially stable suppliers that can be relied upon. Should a key supplier suddenly go out of business a company will have to find a replacement at short notice, this  can lead to a couple of problems. Firstly, the global supply chain has yet to recover from the pandemic and lead times are still very long, a company may have a significant wait before a new supplier is able to deliver key resources, if a company is unable to supply its goods or services in that time it is likely to fail itself. Secondly, having to find a new supplier as short notice means a company is unlikely to be able to shop around and negotiate favourable terms.

It is also possible with Red Flag Alert to monitor companies for any changes to their credit rating and over 100 other key events. This allows companies to proactively react to any detrimental changes in their business operating environment.

Businesses are now needing to be more strategic than speculative and must be more intelligent about who they do business with. By performing due diligence

Can I run a company credit check?

Yes, any business can run a company credit and you can do this using a variety of solutions, including using Red Flag Alert's platform. 

What do companies use for credit checks?

Companies use software for credit checks, and there are many different types of software on the market that is free and paid. Red Flag Alert offers both; a free company credit check report and advanced software which analysis 13+ million businesses with 24/7 financial scoring and up to 12,000 updates per day.

How does a company credit check work?

Company credit checks work by analysing a variety of financial datapoints. Red Flag Alert’s company credit check software uses 142 indicators and collates billions of financial data points, with a company search function of 100+ filters that provides real time information on:

• New CCJ data
• Gazette - Unadvertised petition to wind up
• Gazette - Winding up order
• Gazette - Striking off application
• Business health rating change (via our unique health rating algorithm)
• Current directors and changes in key appointments
• Individual directors’ other business interests
• Business assets and turnover
• New mortgage data

See an example of a company credit check report on Footasylum.

When Should Your Business Perform A Company Credit Check?

A company credit check can be performed whenever but there are a few times when it is crucial.

A business credit check should be performed prior to offering any form of credit. If this is a new customer it is vital that their creditworthiness be assessed and also a greater understanding of the business itself is gained via reviewing their company report.

Should the customer be found to be a financial risk then no credit should be offered and the risk of a bad debt avoided. This will also highlight any new customers that are strong companies doing well, if this is the case they could become a preferred repeat customer and this can be factored into any negotiations.

Before entering into a relationship with a new supplier it is also imperative that a company credit check and other due diligence be performed. Suppliers are as susceptible to insolvency as any other company and should a key supplier fold it may not be possible to source and receive the replacement resources before business and cash flow is interrupted. This is because there are still significant delays in both the national and international supply chain and new orders can have a lead time of months.

It is unlikely that a company would be able to survive for this length of time if unable to generate revenue. Also, as previously mentioned, if a company has to find a new supplier and agree terms at short notice their negotiating position will be weakened, causing prices and payment terms to not be advantageous.

Here are a few scenarios when you should check a company’s business credit information:

Sales prospecting

B2B sales processes can be long and intensive. This means that the cost of acquisition for new customers can be high. 

If a client has a poor business credit score it will fail this process. This wastes time, resources and money. This ultimately impacts your company’s bottom line.

Building company credit checks into your sales prospecting avoids these problems. It ensures you only approach companies with a healthy credit score. 

Also, your sales team doesn't waste time pursuing prospects that later fail a business credit score check at onboarding. This increases their efficiency and provides you with a more sustainable customer base. 

Onboarding

Onboarding is a critical moment in the customer journey—it sets the tone for the entire relationship. 

Unfortunately, it can also be a time-consuming and frustrating process for customers. They are often left waiting on the phone for a credit decision. This means that your customer experience will suffer.

If you have an efficient onboarding experience and can provide instant credit decisions, you’ll have happier customers. And satisfied customers are more likely to buy more and recommend your services. 

Regular monitoring

Just because your customers pass a business credit score check during onboarding doesn’t mean they’ll remain low risk forever. You should check each client’s business credit score at least once a year.

An even better solution is to use a data provider that enables real-time financial health monitoring. By setting up alerts with a real-time data supplier, you ensure that you find out straight away if a client’s financial position begins to deteriorate. 

You can then take preventative measures to protect your business. These measures depend on the severity of the financial problems facing the company. A minor dip might just require further monitoring. More severe issues may warrant calling in invoices or withdrawing credit.

Company credit checks are not only useful before starting a business relationship, it is also necessary to periodically check on the financial health of existing business partners. This is important as businesses can become distressed at any time and quickly become insolvent thereafter.

By regularly running business credit checks on companies you will be able to react and pre-emptively find a new partner should an existing one show signs of failing. This process does not need to be time consuming, Red Flag Alert’s monitoring feature automatically alerts you to any changes, positive or negative, to a business. Allowing you the peace of mind that should any risk to your business arise you will be first to know.

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Why Should Your Business Run Credit Checks on Clients and Prospects?

Running business credit score checks helps reduce the financial risk your customers and suppliers pose to your business. Here’s how: 

Avoid bad debt

If your customers go out of business and owe you money, you are unlikely to get any of it back. HMRC, secured creditors like banks and company directors are all repaid first as part of the insolvency process. 

Unsecured creditors—in other words, companies with outstanding invoices—will be paid last. And usually there isn’t any money left by this point.

Losing money in this way can be fatal for businesses. Companies that experience bad debt are three times more likely to go out of business themselves within 12 months than they would normally. 

Company business credit score checks help you understand your customers’ risk of insolvency and whether you should extend credit to them. This allows you to take preventative measures and avoid bad debt.

Sustain revenues

Losing a client means reduced revenue. This can result in your business losing supplier credit facilities, making redundancies, or reducing investment in growth.

Most B2B businesses rely on just one client for a large chunk of revenue. Losing this client can be catastrophic and lead to the company becoming insolvent. 

Lost revenue isn’t the only issue. Replacing customers is also expensive. The average cost of acquiring a new customer can be up to £1,000.

With regular business credit score checks and customer financial health monitoring, you can see if you risk losing a customer and take preventative action. For example, you could assign more resources to prospect for new customers.

Avoid losing key suppliers

Customers aren’t the only source of risk to your business. If you lose a crucial supplier to insolvency, you may struggle to deliver goods and services. This can slow down cash flow, damage customer relationships and even lead to the loss of clients.

Finding replacement suppliers is time consuming and expensive. Even if you find a suitable replacement, it can be difficult to agree on favourable credit terms with them. You may end up paying more for goods and services or being forced to repay them earlier than you usually would. This will eat into your cash flow. 

How to Do a Credit Check on Another Company 

To check a company’s business credit score, follow these steps:

1.     Set your risk tolerance

Only approving low-risk customers may seem like a good way of keeping your business safe. However, it could also mean that you turn away potentially profitable customers. You must strike a careful balance that protects your business and maximises revenue.

2.     Find a Credit Reference agency

Credit reference agencies—sometimes known as credit reporting companies—hold databases of UK companies. They use this information to provide information and calculations you can use to make credit decisions. Red Flag Alert's database holds information on over 15 million UK and global companies. 

3.     Get a credit report

Enter your credit reporting agency portal and type in the name of the company you want to check. You’ll usually be given several options because there are typically multiple companies with similar names. Choose the one you want and request a credit report.

4.     Make a decision

Your credit report will include a wealth of information, including a business credit score. Compare this credit score and any other relevant information to your risk tolerance. If the credit score exceeds the risk tolerance, they have passed the business credit score check. If the score is too low, they have failed the check. 

If you want to know how your own business fares, read out ultimate guide to improve your business credit scores.

What Information Shows up on a Company Credit Check? 

The information you get on a company credit check score check depends on which credit reference agency you use.

As an example, Red Flag Alert’s company credit reporting includes:

Financial health rating

This score indicates how likely the company is to enter insolvency. Gold, silver and bronze indicate healthy companies. One, two and three red flags indicate companies at risk of failure.

Financial health information

This includes the company’s financial history, credit history, net worth, the cash in the bank, date of last company accounts and the number of county court judgements (CCJs).

Recommended credit limit

The amount of credit that is safe to lend the company at any one time. 

Company details

Including the registered name, registered office address, incorporation date, VAT number, name of directors, contact details, number of employees, the industry the company works in and what activities it undertakes in its daily business activities.

Can You Do a Credit Check on a Limited Company? 

You can run a company credit check on any limited company registered on a government database. The best example of such a database is Companies House. 

Directors of limited companies are not personally liable for the business’s debts. This means that if a limited company owes you money and becomes insolvent, you might never get the money back.

Because of this, some financial services companies also check the personal finances of limited company directors before providing them with a secured business loan.

How To Conduct Your Own Company Credit Check

Checking your business credit score is easy. Simply log in to your credit reporting agency portal and run a business credit score check on your own business.

Most credit reference agencies offer a basic version of this for free. 

This doesn’t provide you with detailed company data. Instead, it gives you an indication of the company’s overall financial health.

Why Are Company Credit Checks Complicated?

A business credit score represents many factors, including its sector, financial information, company directors, economic outlook, distress events and other issues. 

Businesses in obvious financial distress are pretty easy to spot; a history of company CCJs, poor financial records, poor credit history and a large amount of increasing debt are signs that a business may be a risk. 

What is harder to spot is when a business is teetering between being financially stable or unstable. But a closer look uncovers problems.

Credit reference agencies must use a sophisticated algorithm to assess complex data. The information they use is drawn from sources like Companies House. A good company credit report will focus on the critical information and draw specific conclusions. 

Red Flag Alert’s Business Credit Reporting

Many companies purport to offer in-depth company credit checks, but the variability in quality is considerable. 

Red Flag Alert has been developed over the past 15 years to provide a robust business credit checking process, packaged in a variety of solutions so it works for your specific needs.

Here are some of the reasons why our business credit checks are superior to our competitors’:

Specific Company Credit Check Scores

A good company credit checking system should give information that will help to guide your business decision-making and allow you to take pre-emptive steps if one of your customers is having financial difficulties. 

At Red Flag Alert we focus on a granular, flag-based system, which not only indicates financial risk but also shows its level of severity.

• One red flag = 30% of businesses fall into insolvency within 30 months (assurances and perhaps guarantees advised)
• Two red flags = 50% of businesses fall into insolvency within 12 months (guarantees advised)
• Three red flags = 60% of businesses fall into insolvency within seven days (cash with order)

Carillion indicated two red flags for 12 months before insolvency. Any supplier with this information could have mitigated their risk—hopefully saving many from bankruptcy. 

We have spent considerable time building this view of risk scores that indicates when a company may start having financial issues. 

This is essential in responsible customer monitoring because you can see when problems are brewing. Many business credit reports simply tell you when the problem has arrived. 

This is too late as you need to see issues coming, and at Red Flag Alert our model focuses on being proactive rather than reactive You can read more about how we work here. 

What Factors Affect A Company Credit Check?

At Red Flag Alert we use a highly evolved algorithm to make informed decisions based on many data points. We use three scoring models: judgemental, statistical and blended.

Judgemental Scoring Model: This looks at key fundamental factors like audit reports, presence of CCJs, age of the business, etc. These elements allow us to start generating a credit score report. 

Statistical Scoring Models: These models weight different factors based on a range of criteria and build a picture of the likelihood of financial distress by ensuring that the most important factors for a particular business are included. 

Blended Scorecards: This is typically a statistical model with judgemental factors running a set of rule-based overrides, incorporating the best of both worlds.

Scorecard Development Never Stops 

At Red Flag Alert, our team focuses obsessively on scorecard development, because sophisticated scorecards will ultimately lead to accurate financial information and credit reporting. 

We evolve our model so the most leveraged factors are built into the scorecard. Over 25 years, we’ve increased our accuracy and cemented our position as the UK market leader. 

What Data Is Included?

The core attributes we include in our scorecards differ for incorporated and unincorporated businesses. Let’s look at some of the factors for limited companies. 

• Age since incorporation: This isn't highly significant, but it has some statistical importance. The risk between a business with five years of trading versus one with twelve years is material.
• Age of latest accounts: Unsurprisingly, lateness of filing accounts is an indicator of distress. Our data has shown that late filing of accounts is a good indicator of a poorly run company and signifies an increased risk of future financial distress.
• Cash on the balance sheet: This can give some indication—a specific focus on the trend over time and other current assets on the balance sheet gives useful additional context.
• P&L account reserve: Generally less important than cash issues but, unsurprisingly, profitable companies have a lower risk than loss-making ones.
• Shareholders’ funds: Looking at the trend over time can be indicative of upcoming financial problems.
• Liquidity ratio: Unsurprisingly this ratio is an important factor to predict future insolvency. What constitutes a bad ratio will vary from sector to sector, and this context is critical when making judgements.
• Shareholders’ funds total asset ratio: This helps us determine how the business is funded. Often a high proportion of loan capital indicates an elevated credit score risk.
• County Court Judgements: In certain circumstances, CCJs may not be a good indicator of insolvency. These need to be contextualised by considering the size of the business and the value of the CCJ. The number and the timing of judgements are also important.
• Audit Conclusions: Audits are not always indicative of issues, but specific comments published in them can be crucial.

Worried about a Customer Business’s Creditworthiness?

Red Flag Alert is your complete solution for company credit and risk checks. Our award-winning platform uses an industry leading algorithm to not just judge the creditworthiness of a business, including a suggested credit limit, but looks for warning signs of business distress and insolvency.

Company credit checks are delivered as part of a complete company report that gives you a detailed understanding of the financial position of a company. These reports are laid out in an intuitive and easy to understand way and show information such as:

• Full company financials
• CCJ information
• Bad debt information
• Average payment time
• Complete history of events at the company
• Portfolio Management 
• Company Monitoring 

Our monitoring feature allows you to create separate monitoring portfolios which can all be customised and shared within your organisation. Ensuring that you do not miss any information you need to know.

Book a demo today to find out how Red Flag Alert’s company credit checking solution can help your business, alternatively you can use our free company credit check tool.