DUN & BRADSTREET SINGAPORE

MIND YOUR CREDIT RATING

Businesses have become increasingly dependent on credit. But while offering credit to customers is a useful business tool, it brings with it the risk of late payment and bad debt. To minimize these risks, it is essential to credit check new and existing customers before giving credit and to continue to monitor their payment practices throughout the business relationship. This article discusses the importance of credit ratings, what a credit score is, and the D&B New Credit Risk Index. It also includes some brief tips on how to maintain a good credit record.

A credit rating is an important measure of the financial health of a company. It gives an indication of how the company is performing in absolute terms and makes it possible for a company’s creditworthiness to be compared against that of other companies in the industry. It also gives an indication of how a company is expected to perform in the future and whether it is well placed to repay its debts and meet its overall financial obligations. Furthermore, it allows lenders and business partners to determine what risk is posed to them should they engage in any lending and business dealings with an organization. A business credit rating provides a point of reference so that it can be ascertained if a business poses a credit risk.

On the other hand, a credit score is a statistical method to determine the likelihood of an individual paying back the money he or she has borrowed. Different credit agencies have different scoring systems, each based on different factors. The primary factors used to determine a credit score include credit payment history, current debts, time length of credit history, credit type mix and frequency of applications for new credit. The information on an individual’s report impacts the ability of a business to apply for finance and credit terms with other business partners. That is why it is important that the credit report of an individual should be clean.

A credit rating can be classified into two categories. The traditional approach uses qualitative ratings based on the opinions of business analysts about a company’s health. The ratings are determined by taking into account financial data, company interviews and other market information. These ratings are more subjective as they are based on the opinions of analysts.

The other more quantitative approach, which is sought after by more companies for greater transparency, focuses solely on available financial data and ratios to generate a rating. In this method, credit agencies use complex software to compute the ratings and input financial data from a variety of sources to produce more rounded ratings that are not based on opinions which can be subjective.

The D&B New Credit Risk Index (NCRI) is a credit rating that ranks businesses and identifies less creditworthy companies. It is based on the Index Development sample of more than 500,000 company records and provides a quick assessment of a business’s risk standing, based on observed business failure of companies in Singapore. The NCRI is a rating from 1 to 6, with 1 being the best and 6 being the worst. The rating is developed based on a number of indicators such as business information, payment information from suppliers, court filings and financial information. Each indicator is given a specific weightage to calculate the NCRI of a company. The NCRI provides a value-added tool for transactional and portfolio applications which effectively ranks risk. There has been an increase in companies using the D&B NCRI to make business decisions and leverage the level of risk for a potential customer or supplier. It is beneficial for businesses as it allows them to make informed and confident decisions.  

Credit is important in business dealings and it is advantageous to be aware of the credit score of your company. Overlooking the credit rating of a company could be detrimental to the financial health of your company. Below are some tips to improve or maintain a good credit rating.

• Always Pay on Time

The payment experience of your suppliers is a key part of a credit profile. Companies should always pay on time according to agreed terms.

• Ensure all Trade Experiences are Represented

A lack of information on your company can be harmful for a company. It is not required that a company sends information about its customers to a credit agency, so the key to establishing a good rating is to forge relationships with companies that will establish credit for your business and that may report positive information when asked, as a trade reference.

• Update Registration Details

Credit agencies obtain information of a company from various sources such as telephone directories, web pages, and auditors to ensure that the company is operating and genuine. Getting listed allows credit agencies to contact the company and obtain information should there be a need.

• Keep Personal Finances in Order

Some credit agencies may offer personal credit profiles of key individuals of a company. This is especially so for smaller companies that might not have a detailed business credit rating. Thus, it is important to keep personal finances in order as it can be used as a reference for business ratings.

References

Credit Management Advice, www.payontime.co.uk. Retrieved on July, 24, 2006

The Importance of Your Credit Rating, www.investopedia.com. Retrieved on July, 24, 2006.

Managing risk in your portfolio – the importance of credit ratings, www.asx.xom.au. Retrieved on July, 24, 2006.