Calculating company credit scores: no more surprises!

Aug 27, 2020

credit scoring

Company credit scores are more important than ever. The financial crisis triggered by COVID-19 is having a major impact on businesses, leading to higher credit risks, more defaults and even bankruptcies. Analysing a customer’s credit score gives you an insight into the company’s creditworthiness and helps you neatly sidestep the impact of the financial crisis.

Credit score explained

The credit score indicates the creditworthiness of a business or individual, in other words how able the business or individual is to pay their bills and other debts. The higher the credit rating, the greater the chance that bills will be paid on time.

If your customer has a low credit rating, be careful: there is a greater chance they will pay their bills late or not at all. In fact, they may even end up going bankrupt. In other words, they’re a bigger financial risk – or credit risk. You can find more information about credit risks at this blog.

A company’s credit score can be expressed with a letter or number, for example:

  • Creditsafe: AAA rating
  • Graydon: 0 to 100
  • Companyweb: -5 to 5

Why the credit score is important

By calculating the credit score you gain more of an insight into the creditworthiness of your customers. Here are some of the benefits:

  • predicting the payment behaviour of customers;
  • objectively allocating payment terms;
  • objectively deciding on following up accounts receivable;
  • managing financial risks more efficiently;
  • taking informed decisions;
  • building a better relationship with your customer by making correct and fair decisions.

How the credit score is calculated

The information used to calculate the credit score is very specific, making it almost impossible to perform the calculation yourself. Fortunately, you can call on specialised business intelligence firms (such as Graydon, Creditsafe and Companyweb), which can immediately provide you with a company’s credit score.

By default, the credit score is calculated on the basis of multiple variables. The most common variables are:

  • the payment behaviour of the debtor in the sector;
  • any negative incidents (e.g. previous bankruptcies involving the CEO);
  • the company’s liquidity.

The age of the company, changes in the number of online searches for the company and other relevant company data are also often included in the calculation.

credit risk

What credit score is considered good?

To get the most out of credit scores, calculate them as early as possible, before negotiations even start. Doing so will ensure a potential customer’s credit rating is taken on board right from the start and credit risks are minimised.

“To get the most out of credit scores, calculate them as early as possible”

Now that your customer’s credit rating has been calculated, it’s time for the next step: interpreting the credit score. The higher the number or the closer to A, the better the credit score and the higher (or stronger) the company’s credit rating.

The difference between a good and a bad credit score is very relative and depends to a large extent on the rating system used by your business intelligence firm. With most numerical rating systems, however, it is comparable to a school report card: a score of less than 50% indicates failure.

My customer has a low credit score. What now?

Don’t panic! A low credit score does not necessarily mean your customer is about to go out of business or stop paying their bills. The credit score is based on multiple variables, which means it can also move back in the positive direction if, say, the company increases its turnover and profits, or starts to pay its bills more punctually.

However, you do have to be extra vigilant. In this case, the credit controller can, for example, decide to adjust the customer’s payment terms or ensure tighter follow-up of accounts receivable.

But it is important not to lose sight of the human side. So, if you notice that a customer’s credit score has suddenly changed significantly, then contact your customer to talk about it. Perhaps you can come up with a solution together.

The iController score: credit score at its best

At iController we think the credit score is so important that we’ve baked it right into our tool.

With the iController score – the personalised risk score built into our tool – we took things a step further. In addition to the credit score, which is provided by one or more external parties of your choice, an extra variable is also incorporated into the risk score: the specific payment behaviour exhibited towards your company.

This combination has the following benefits:

  • the specific credit risk with respect to your company is also shown; and
  • the appropriate workflow can be determined very accurately.

There is a catch in the standard way a credit score is calculated: a company with a low credit score is not necessarily a bad payer and vice versa. You can find more information about these exceptions in this blog.

By including the specific payment behaviour in the credit score, the iController score takes such exceptions into account and you maintain a true picture of your customer’s potential credit risk. You choose which external or internal variables you prefer and the weight of each variable in the iController score.

“A company with a low credit score isn’t necessarily a bad payer and vice versa.”

Do you use our credit management software? Then you can opt to link the credit score to a specific follow-up process. Once the iController score falls above or below a specific number, the customer is automatically switched to the relevant follow-up process. Read more about it in this blog about RPA. By doing this, you’ll make your company’s credit management simpler.

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