Credit rating conundrum

PR writes: I own and run a small trading company that installs swimming pools. I recently hired a firm of electricians whi insisted I pay half the fee upfront because of our credit rating. They have provided a copy of the credit-rating report they use, which shows "credit rating suspended" and "unaudited accounts". It also shows the company has made profits in all recent years, but has net liabilities. These are mostly my director's loan. Is there anything I or my accountant can do to improve the rating or explain the position?

Answer

The two key factors the rating has highlighted are the net liabilities and the fact that the accounts are not audited, writes Jon Sutcliffe, partner at Kingston Smith.

Small companies are usually exempt from having to have their accounts audited. Having an audit will give suppliers more confidence in your accounts but most small businesses do not bother.

You could ask your accountant what it would cost, but the solvency of your firm is a greater issue. Despite recent profits, your balance sheet still shows net liabilities. This usually means their are insufficient funds to pay all creditors.

However, your directors' loan account is the main creditor. If you were to convert some of this capital, the balance sheet might become solvent. This could give you a good credit rating, but once the directors' loan is converted to share capital, it cannot be drawn out of the company in the same way as a directors loan.

You should take the advice because the costs of auditing or making the company solvent may outweigh the benefits of improving its credit rating.