How is the Risk Score calculated?
The Score calculation was created by analysing companies over a 12 month period. Using discrimination analysis, we identified key data variables that are essential in predicting the probability of a company becoming insolvent within the next 12 month period. These variables were then run against our entire database of companies and through statistical analysis, an appropriate risk weighting was assigned to each variable. Through the calculation of these key variables, combined with current variables we generate the credit score.
Our algorithms include further analysis to reflect insolvency trends by industry SIC codes ensuring that companies in the worst affected industries have their ratings reduced appropriately. Industry insolvency statistics are re-assessed quarterly and algorithms adjusted both as a whole and by industry so that we continue to have the most up to date and relevant rating possible.
How is the Credit Limit calculated?
We calculate Credit Limits by looking into a company's financial position in greater detail. By analysing critical credit information fields in conjunction with the credit rating of the company we can base a credit limit decision more accurately. These fields include:
Net Worth
Working Capital
Net Cash Flow Operations
Debtors & Cash
Turnover (larger companies where available)
Typically if a company has a positive rating and the above financial fields are all of high values then you can expect this company to have a reasonable credit limit, if these values are low (or negative) then the credit limit decision will reflect this. The above financial items are standard for credit assessment terms.
What factors contribute to the score and limit?
- Age of company - A newer company wouldn't be penalised for it's age, but an older company will have more history to assist with a calculation.
- Company size - Small and Medium sized companies are scored using a separate calculation to large sized companies.
- Financial performance - Net Worth, Cash etc is compared to previous years and with similar sized companies.
- Age of financials - Analysis has shown that small sized companies who file within the final 15 days of their due date are almost three times more risky than a company who files in good time. For large companies No Rating is provided if the accounts are filed late.
- Ratio analysis - Return on assets employed etc.
- Comments from independent auditors - Any adverse comments would affect the score.
- Director's history and performance - If a director is associated with companies which are insolvent or have adverse information this may affect the score. The number of directors and changes within the management of the company is also considered.
- Group influence - If the company is part of a group, the companies within the group will also be analysed to look for adverse information such as insolvency. Such information would affect the score.
- Demographics - Where the company is based may have an affect on the score if the area has seen an increase in insolvencies.
- Mortgage data - The amount and number of mortgages against the company will also affect the score.
- Industry insolvency trends - Analysis is carried out across the country and adjusted quarterly.
- Number of CCJs - The more County Court Judgements, the bigger the affect on the score.
- Value of CCJs - The bigger the value of the County Court Judgements, the bigger the affect on the score.
- Frequency of CCJs - How often and how recent. If a company receives a number of County Court Judgements within a short space of time, this would be considered an increased risk.
- Time critical filings - Any documents which are over due for filing at the registry would suggest an increase in risk.
What does Risk Score mean?
The score rates from 0 - 100 and predicts the likelihood of a company becoming insolvent within the next 12 months. There are five bands from Very good credit worthiness to Caution - credit at your discretion:
71-100 Very good credit worthiness
51-70 Good credit worthiness
30-50 Credit worthy
21-29 Credit against collateral
0-20 Caution - Credit at your discretion
No Rating Financial Statements too old / Liquidated / Wound-up / Dissolved / Petition filed
What is the Credit Limit?
The company credit limit is our recommendation of the total amount of credit that should be offered to a given company at any one time.
Are all companies scored using the same algorithm?
No. Our algorithms are split in two for established companies using the Companies House definition of a small company for one and all medium and large companies in another. We also have a separate algorithm for Non Limited companies and for New companies (less than 22 months old and yet to file financial information).
How often is the Risk Score and Credit Limit calculated?
The scores are calculated daily and are entirely automated, there is no manual calculation required to manipulate or adjust credit scores/ratings. Daily feeds are taken from our databases to update scores on a real time basis. If a company submits its latest accounts to Companies House, then as soon as these are available to the public (usually 10 working days later) the documents will be analysed within 48 hours and updated on the database. As soon as this is completed the company's credit risk score will be recorded/adjusted based on the latest filed accounts.
The system also continually incorporates the following time critical information, which updates the credit scores on a real time basis:
Companies house Gazette
London, Edinburgh & Belfast Gazette
CCJ & High Court Writ data
