At Red Flag Alert we use our own methodology for calculating credit limits for businesses.
We follow the same processes and methodologies that you would find in other similar businesses and financial institutions. Our approach can be explained under 3 main categories:
• Financial and Non-Financial Attributes of a Business
• Methods of calculation
• Events that can change a credit limit
When we create a credit limit for a business we look at a number of different financial attributes of that business. These include, but are not limited to:
• Net Worth
• Current Assets
• Creditors
• Current liabilities
• Working Capital
• Shareholder Funds
• Long term liabilities
Depending on the nature of the business and the availability of these attributes, that will dictate both which attributes we use in our calculations and the methods we use for calculation.
Where a business doesn’t have any or enough financial attributes for us to use in our calculations, such as newly incorporated businesses, we will look at other attributes such as sector, presence of VAT number, etc to calculate a credit limit, although those limits are usually capped at a relatively low amount until we receive financial data on them.
When calculating the credit limit for a business we employ a number of different factors, depending on what financial and non-financial attributes are available. Some limit calculations will use just a couple of attributes to calculate ratios that then drive the credit limit, whereas some will consider the presence of that attribute and run in a waterfall style i.e. if attribute A is not present, then use attribute B, if that is not present, use attribute C etc. Lastly, we will also consider sector based attributes to calculate sector based credit limits.
There are a number of events that can change a credit limit. If a company files accounts that change the ratios generated by the financial attributes, then that can raise or lower a credit limit. If a company goes insolvent, or there are events, that our analysis demonstrates, that the business is highly likely to go insolvent soon, then that will generate a change in the credit limit, and in some cases, the removal of the credit limit completely. If a company gets a number of CCJs, then that can generate a change in the credit limit also. Credit limits can be reinstated should certain events be reversed or nullified due to other events, such as accounts being filed.
At Red Flag Alert we continuously monitor and assess our credit limits, Growth Score and Health Ratings to ensure accuracy and relevancy. We report internally on a monthly cadence, and make recommendation's and changes that deliver a market leading business and credit risk service to our customers.
If you have any further questions, please reach out to our Support Team via Contact Us.