How to Interpret a Credit Report.

19/4/2017. By David Hawkins.

In recent years, online credit reports have become an increasingly important part of the credit assessment process. Long gone are the days of the trade reference – inevitably biased in favour of the debtor’s capacity to pay – or on the other hand, the absurdly cautious and oddly worded bank report, often produced without any real knowledge of the customer’s business.

These days the trade credit grantor has a plethora of information about existing and prospective customers.   Credit reporting agencies use thousands of items of data in producing their forecasts of the likelihood that a company or sole trader/partnership will experience financial stress.

Credit reports can themselves seem complex and sometimes apparently contradictory.  As a consequence all too often credit controllers and managers focus almost exclusively upon the credit limit (and perhaps the Risk Score) in deciding whether to offer open account facilities to new or existing customers.

This may be understandable in the day to day atmosphere of a busy office where sales are crucial and urgent and no time is available for more detailed analysis. But reports from The Credit Protection Association (CPA)  are designed to provide the key information in a user friendly format that make it possible to asses quickly the critical information required to grant credit quickly and as safely as possible – without simply relying on the Rating – important as it is.

This is how:

KNOW YOUR CUSTOMER (especially new ones!)

Often, we see instances where suppliers are unclear about whom it is they are supplying. Wrongly addressed invoices, confusion about correct company names, misunderstanding between the trading status of the customer – all these are surprisingly common. The Company Identification Section of our Reports helps with these issues. The description of the company or firm is accurate. The supplier knows who is being supplied and can get the proper trading address , note the registered office,  VAT number, web address (in many cases) and of course banking details.

Vital data such as the date of incorporation of the business is there. Also the date of filing of the last accounts and the annual return is shown. Before glancing at a single figure the supplier can get an idea of the size and quality of the business by noting the number of staff and can see who the auditors are.

The Key Filings Section shows whether the annual report and accounts have been delivered promptly. Changes of directors (which can sometimes be crucial) are easily noted.

All very simple features but they mean that before even looking at any figures the supplier can get a pretty good idea of the size, shape and solidity of the business.


This knowledge can be enhanced immediately by reviewing the Ownership and Directors sections of the CPA Report.

Shareholdings can be easily checked. If the company is owned by a well – established profitable company this can provide reassurance – even though such a company will not usually consider itself liable for the trading debts of a subsidiary. On the other hand if the owning or holding company is financially weak this can be dangerous as it is possible that the profitability of the subsidiary may be prejudiced.

In smaller debtor situations, issued share capital is of vital importance. If the investment in the business made by the participants is paltry, is it realistic to expect suppliers to invest perhaps thousands of pounds in trade credit? Remember too that loan capital, as opposed to share capital, can be withdrawn very quickly, sometimes on demand and cannot always be taken as a true measure of commitment.

The Directors’ section is also extremely useful. It is possible to see immediately whether a company has a well – established and stable board or whether it has been plagued by numerous changes in directors whose commitment to the company is less than total

It is always prudent to check the other directorships held. Has a director (or directors) of the subject company held a string of directorships in failed companies – many of which will have left creditors in the lurch in the past.  How many directorships   have they held? Is it realistic for them to concentrate on running the affairs of the company under credit review?  All of these questions can be relevant. The answers will depend as much upon common sense judgments as upon credit skill, but they will frequently be the determining factor as to whether credit should be given.


CPA’s experience over many years is that the presence of unsatisfied CCJs is all too often a prelude to serious financial difficulty and failure to pay. In assessing a new customer relationship their existence should be questioned by the supplier and in the absence of a satisfactory response from the credit applicant, the account should be operated on a cash basis until trust and track record are established.

From time to time larger, well rated businesses incur CCJs and of course continue to trade and pay successfully –some major public companies are examples. Where unsatisfied judgments exist our credit report may still show a rating and credit score. But in cases of this kind we draw attention to the existence of the judgments at the head of the report so that the matter can be considered in the round. In most cases where the unsatisfied CCJ is accompanied by declining profit and/or net worth the limit is withdrawn.


A major advantage of status reports as compared with other forms of credit information is that the trends within the financials are spelt out and analysed. Thus it is possible, even quite easy to review say four years accounting information at a glance paying particular attention to movements in assets and liabilities, expansion and decline, profitability and loss. And above all cash flow.

A balance sheet is a snapshot of the companies’ assets and liabilities at a moment in time. A Profit & Loss Account is a summary of income and costs over a given accounting period. Both can be presented by credit seeking management in ways to emphasise, even overstate the financial health of a business. This is much more difficult over say, a four year period when the trends can be picked up and the true direction and worth of the business analysed.


In many cases however, the busy credit controller does not have time for exhaustive analysis of the financials of a business. In any event it is the case that the health of the potential customer can usually be judged by the movement and current position of a few key elements:

·        Sales turnover (where available )

·        Profitability – notably retained profit after tax and dividends

·        Cash flow

·        Return on capital employed

·        Movement in net worth

·        Borrowing ratio

The Credit Protection Association provides both the figures for a four year span and the ratios for all of these (see Basic Ratios) .

These are not necessarily the only financials that can be of use in granting credit but, in our view, they are the most essential items of financial data contained in the Detailed Financials Section of the CPA report and the ones that will assist most in the determination of application for commercial credit.


Sales figures are of course not always available – particularly in relation to SMEs but where there are several years sales figures available, they are a valuable refection as  to the growth of a business and to its potential for profit


Without profitability, companies cannot survive indefinitely and a healthy trend assists greatly in the decision to grant credit.

Cash Flow

This is by far the most important. Evidenced by a healthy Current Asset/Current Liability position – two to one is really healthy but rare these days. Accompanied by a good Debtor/Creditor ratio it is the surest of all signs that obligations will be met.

Return on Capital Employed

Particularly relevant in relation to larger credit line on better established businesses;  this is the fundamental measure of business performance

Net worth

Growth in net worth indicates that sufficient profits are being retained in the business.

Borrowing ratio

A good rule to apply is that external borrowing from banks or other lenders as opposed to creditors should not exceed 100% of net assets. This is particularly the case where lending is secured by a fixed and floating charge over all of the assets of the subject company which give the lender, usually a bank considerable power over the running of the business.

We hope that some of the above will be helpful in solving the eternal dilemma that exists between achieving sales and avoiding late payment and suffering bad debts. As all credit managers know, there are no hard and fast rules in making credit decisions. Each case is different.

One general piece of advice that the writer received many years ago from an old-style credit man is still valid, however.

“If you are worried about any of the facts that you see – don’t be scared to ask questions “(of the credit applicant). That’s still very good advice.

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