A community of Finance Directors

1. A community of Finance Directors Credit Scoring

2. A community of Finance Directors The different types of credit scoring • Countries • Corporations • SMEs • Individuals

3. A community of Finance Directors Individuals Lenders use their application forms and information from credit rating agencies (Experian, Equifax, Call credit) and fraud databases (National Hunter, CIFAS): • They DO check • address, including addresses and people that you’re linked to; • CCJs, bankruptcies; • Fraud, including theft OF your identity; • full payment records (inc how much you re-pay) if you get cash advances (DON’T) and defaults ; • Past dealings. • They CAN’T check: • Fines, convictions, CSA; • Medical records; • Relatives UNLESS have a joint product; • Missed payments more than 6 years old OR an account closed more than six years ago; • Declined applications (but can work it out!)

4. A community of Finance Directors Check your data • Inaccuracies occur. • Credit ratings - Amend or add “A notice of correction”; • National Hunter – spots possible information discrepancies in 5% of applications. So be consistent and check it (£10) • CIFAS – frauds at your address will show but SHOULD be eliminated on investigation • Old accounts get forgotten by you but not by the computer; • Checking your file is “guilt free” – no-one knows

5. A community of Finance Directors Use the quick credit checker on money saving expert • Age • Time at address, on electoral roll High is good • Applications in last 6 months and last 18 months • No. of cards and other credit accounts • Missed payments CCJs IVAs Low is good • Paid off in full • Good for mortgages not so good for credit cards

6. A community of Finance Directors Company reports Dun & Bradstreet et al No. of days for payment cf last 12 months and industry average. Simple not weighted average Judgements Credit Limits now operating Size (net assets) and “composite credit appraisal” based on cashflows and ratios Gearing ratios are sector specific, know your ideal gearing!

7. A community of Finance Directors Composite credit appraisal • We don’t know! • But we can calculate the z-score, which was devised in 1968 to correlate historic financial information to corporate survival • Z= 3.2+12.18*x1+2.5*x2-10.68*x3+0.029*x4 where: • X1 = PBT/current liabilities • X2= current assets/total liabilities • X3= current liabilities/total assets • X4=no-credit interval (quick assets/daily operating expenses (all costs pre –tax ex dep’n/365) • Z>0 is solvent z<0 is at risk

8. A community of Finance Directors Does it work? • It is an empirical deduction. So it applies to UK listed companies only • 232 out of the sample of 27,000 failed and 223 of these 232 had z scores<0 • BUT 7,000 had z scores<0 and did NOT fail • It is objective and a better measure than PBT

9. A community of Finance Directors What about SMEs • Lenders use “Delphi”, commercial risk rating based on geography, sector, directors’ history etc. 70% is the score you need. • Up to £25k “Computer says yes or no”. • Above £25k bankers (drink) CAMPARI – • Character of management • Ability of business • Means (resources and reporting) • Purpose of loan • Amount required • Re-payment terms • Interest & insurance • Relationships are important, if you provide regular P&L there will be no nasty surprises

10. A community of Finance Directors What about the banks own position? By 2019 their Tier 1 capital under Basel III needs to be > 8.5% (WAS 4%) of risk adjusted assets +2.5% seasonal buffer. AND their Tier 1 & 2 capital needs to be > 10.5% (WAS 8%) of risk adjusted assets + 2.5% seasonal buffer

11. A community of Finance Directors Summary • Be reliable, pay people on or near time and make sure your records show this • Z scores are useful for larger companies but not infallible • Use D&B • Would you LEND to you? • Does your bank want to lend? • Good business + good relationships = positive cashflow

12. A community of Finance Directors Thank you • malcolm.durham@fdsacademy.com • www.fdsacademy.com