Red Flag Alert are proud to announce the release of our proprietary numerical credit scoring system, to accompany our easy-to-understand colour-coded health rating within our software. The score gives our users an even more accurate prediction than previously offered, highlighting any credit risks or potential business failures within the next twelve months.
Understanding your business credit score is the first step towards improving it. A score provides new opportunities and helps you to navigate any current or future financial challenges, whereas a poor business credit score is restrictive, and your company activities will be more limited.
We sat down with Beth Ashberry, one of Red Flag Alert’s Data Scientists, and discussed exactly what this new feature means for our customers.
What is the 0 - 100 score?
As you can see in the above screenshot, the addition to our platform is a numerical business credit rating, ranging from 0 – 100. This accompanies the existing health rating score and provides more information to our users.
“In the past, we have never had a way to compare companies within the same health rating banding,” says Beth. “The 0-100 score standardises the specific score in each scorecard to make them unified for everyone. It makes for an easier comparison and keeps things consistent.”
Why did you make these changes?
“Our customers would like to distinguish between ratings. For example, if a company is 39, that’s very close to a ‘bronze’ rating. Their financial situation is likely to be very different from a company that has a score of 20, which is just in the One Red Flag category.
The scoring helps you to determine between companies within one rating better than we could do before and distinguish the differences in businesses that may have the same rating. It provides a better view of the boundaries of our scoring system and of the company as a whole.”
What does this mean for Red Flag Alert users?
Red Flag Alert always strive to make things as user-friendly and clear as possible, to ensure our customers get the best experience and most comprehensive business intelligence to support their ongoing activities.
“This change means that our business ratings are going to be a lot clearer, and easier to read and understand,” says Beth. “We’re live within our platform now, so every RFA user should be able to see it for themselves. Check your account to see it in action!”
How is the score calculated?
Very simply, the score is calculated by standardising the raw score from each of our twenty scorecards, and then subsequently applying a variety of overrides.
“The business credit score is calculated using a target sample and a control sample. We use this to model exactly what fields or categories are most significant. So, we can look at the age of the latest filed accounts, for example, or the different kinds of assets, liabilities, liquidities, multiple different things,” says Beth.
“Without going into too much detail about the specific mathematics, we separate the different accounts. So, are you a big company or a small one? And we group them into the right categories to make it fairer. We use this comparison to predict future insolvencies.
We have a numerical value which we calculate using a comparison between the best companies as a threshold – so the number we reach is the biggest difference between the insolvent companies and the companies that are in business.”
What would you classify as a good score?
Here is Red Flag Alert’s banding breakdown:
80 – 100: Gold
60 – 79: Silver
40 – 59: Bronze
20 – 39: One Red Flag
10 – 19: Two Red Flags
0 – 9: Three Red Flags
Beth says, “Anything sitting at 40 or above (a bronze rating) is classified as good, but I’d advise people to use their discretion. A company at the top of their current band, for example at 38 or 39, is likely to be very close to hitting that ‘bronze’ level.
It’s also worth bearing in mind that our algorithm rounds down, so a score of 39 could be very close to a ‘bronze’ level, with only a tiny percentage off. It’s not to say they are a bad company, just not quite at the designated threshold.”
What does it mean if you get a low score, and how can that be fixed?
“We always advise that one of the main issues causing businesses to be rated lower is because of accounts being overdue, or that you are late filing. We don’t tend to give a high credit rating for any business that hasn’t provided us with any info for two years,” says Beth.
“Some of the companies may be 22 or 23 months since they filed, and yes, they may have an extension so technically they aren’t late filing their accounts – however, we’ve had no data for two years and a lot can change in that time. So, our score does penalise those people.
Therefore, the quickest and easiest way to bring your score up is to file your accounts straight away - it will make your score go up. Unless, of course, your financials are significantly worse, in which case your score will likely go down.
As long as you are healthy, you pay your debts on time and aren’t getting any CCJs, with no unsecured creditor debt, no winding up petitions, no obvious downward trends in terms of assets, or increasing your liabilities. My main advice is still the same, file your accounts on time, or as quickly as possible. Be in a stable financial position, in order to get a bronze or higher rating.”
What is the average score?
“Our average score is likely in the bronze category, about 43% - 44% of companies have that rating making it the most popular one by far,” says Beth.
“The majority of companies that you are looking at, numerically speaking, are likely to be sitting around a 50 rating. Pretty much bang in the middle.”
How does this differ from the health rating or the flag system?
Beth says, “We’ve created this as a compliment to the current flag system. Each rating corresponds with a specific flag, so the numerical score sits alongside it.
It gives you a bit more information. Previously you could only see if it was gold, now you can see if a company is gold but also compare two companies at the same level. In the past, you wouldn’t have been able to do that. It provides more information and more transparency.
Protect your business from insolvency with Red Flag Alert
Firms can be put at serious risk when their customers or suppliers become insolvent, particularly if they have been extended products or services on credit.
Red Flag Alert helps you protect your business from this. We are the UK’s only independent credit referencing agency and we hold data on every UK company, as well as businesses in countries around the world. Our business insolvency risk scores indicate the likelihood that your customers or suppliers will become insolvent.
We collect more information from a greater number of reliable sources than any of our competitors—meaning we spot risk factors that they don’t. Our database is updated in real-time so that you can base your decisions on accurate, up-to-date information.
To see some of the powerful insights our data provides, get a free trial of the platform today.