What can impact a company’s credit limit.

Published on 28^th March 2024

Every supplier of credit information will have invested in different algorithms to attempt to produce the most relevant credit limit and credit scores. Unfortunately this is never going to be an exact science.

The majority of credit reference agencies will take mostly the same factors into account when suggesting credit limits but how they apply each factor will be slightly different. 

For example, most agencies will take outstanding mortgages and charges into consideration when suggesting a credit limit and score for a business, they will also take into account the businesses age, location and line of business. The weighting of each of these factors though may be slightly different, so one agency may score lower for a business in the construction industry than another, or higher for a business based in London than another.

Some other key elements of a credit reference agencies algorithm:

• Net Worth: This reflects a business’s solvency, assessing whether it would remain financially viable after settling all liabilities. A negative net worth can significantly impact a credit score, sometimes leading to the denial of credit altogether.
• Working Capital: Vital for assessing liquidity, working capital reveals the cash flow available to a business after deducting current liabilities from current assets. A low or negative working capital could signal potential difficulties in meeting trade creditor payments.
• Turnover: While turnover indicates a business’s size, it holds minimal sway over credit limits if expenditures exceed earnings, rendering the business unprofitable.
• Assets and Liabilities: Tangible and intangible assets, compared with liabilities, form a crucial aspect of credit assessment. A decline in assets, particularly alongside rising liabilities, can spell trouble for credit limits.
• Late Filings and County Court Judgments: Late filings at Companies House and County Court Judgments (CCJs) reflect negatively on a business’s organisational efficiency and financial health, respectively, impacting credit scores accordingly.
• Winding-Up Petitions: Among the most serious threats, winding-up petitions significantly impact a business’s creditworthiness due to their severe consequences.
• Notice of Intents: Notices of Intent highlight a concern as they suggest that the company may have difficulty meeting its financial obligations and could be taking steps into official insolvency.
• Directors’ roles are also examined, with resignations or departures carrying significant implications. Such events are viewed as potential knowledge and experience loss, prompting adjustments to credit limits for a period of time.
• Payment data – the majority of CRA’s are now collecting payment data, which they say gives an indication of how promptly a business pays its suppliers. However, in reality this non industry specific data very often strongly differs from real, industry specific trading experiences.