How RFA’s Company Financial Risk Score Challenges the Status Quo

The UK economy is unrecognisable from what it was four years ago. Factors like the Covid-19 pandemic and macroeconomic pressures such as the invasion of Ukraine, interest rates and inflation, bad debt, and harder-to-access funding have all had an impact. The economic picture is constantly changing as the landscape of business in the UK evolves.

It would be hugely inaccurate for credit rating agencies to continue using pre-pandemic scoring methods, but this is exactly what most of our competitors, like creditsafe,  have been doing. They continue to use outdated scoring models that no longer reflect reality – the world has changed and so must the way we assess the financial health of businesses. 

Predicting the collapse of Buckingham Group

Did your provider alert you? There was upsetting news as construction giant Buckingham Group ceased trading a few weeks ago, and put over 600 jobs at risk. Here at Red Flag Alert, we spotted that they were struggling in October 2022, months prior to when the group officially released their statement. We sent out alerts and let our users know that there was financial instability within the business, and to proceed with caution.

It's another sad loss for the construction sector, which struggles with a multitude of issues from the economic downturn, the price of materials and a significant skills shortage driving up wages.  However, working with Red Flag Alert  helps our users spot early warning signs that a company you’re working with might be in trouble. It’s an essential safety net, particularly for those in at risk sectors like construction and retail.

PDR Construction and P&O Ferries

Some of the industry’s biggest names use scorecards that were designed years before the pandemic struck, this puts their customers’ businesses at risk. A good example of this is Yorkshire-based PDR Construction LTD.

PDR was a large UK construction company. In early January 2021, Red Flag Alert rated the business with ‘One Red Flag’, meaning there was an elevated risk of them defaulting on their debts. We also recommended against extending credit to the company. On Tuesday 11 January 2022, PDR filed for administration. 

The unsecured creditor losses were very high. Businesses using Red Flag Alert’s competitors to monitor their debtors would have had no idea of the risk that PDR posed, and would still be at risk of absorbing bad debt or offering a failing business a line of credt.

Here are the credit limits that three of the UK’s largest credit reference agencies recommended extending to PDR until the 12^{th of} January 2022 when PDR was in administration:

• £1.1 million
• £435 million
• £470 million

In another example, Red Flag Alert's unique insolvency index plotted the potential demise of P&O ferries, twelve months before any other creditors picked up on any risk. As of the 2nd of February 2022, we had scored the business with ‘One Red Flag’ with no suggested credit limit, indicating that companies should trade with caution as they present risk factors that might include a deteriorating financial position. As of 16^th March 2022, some other credit referencing agencies scored P&O Ferries with a 100 out of 100 rating which indicates very low risk and, a credit limit of £13,000,000. 

Without using Red Flag Alert, businesses who may be owed money by P&O Ferries or who provide services to them may never have known that the risk even existed, leaving them in financial distress. 

What makes our company credit scores different?

So why does Red Flag Alert know that some of the biggest names in the industry don’t? 

• Our data is updated in real-time twenty-four hours a day. 
• Our scoring algorithm is based on fifteen years of insolvency data.
• We’re constantly evolving our algorithm to reflect today’s economy.
• We use data from more sources than our competitors.

We’re the only credit referencing agency that constantly adapts and updates our scorecard. We analyse trends and use them to recalibrate our scorecards so they reflect the reality of the current economy.

As a result, our credit scores are the most accurate and up-to-date available. This allows Red Flag Alert users to be proactive and monitor customers for signs of risk, an essential step to protect themselves in a tricky economic climate. 

It’s quite simple - all you need to do is choose the customer businesses you want to monitor and set up custom alerts. You will be notified in real-time if anything about that customer’s financial position changes. This allows you to take proactive measures at the first sign of financial difficulties, which could involve anything from further monitoring to withdrawing credit or calling in invoices. 

Detailed financial ratings

Most of our competitors give companies a credit rating out of 100, however, this doesn’t indicate whether a company’s financial health will improve or deteriorate and leaves some scores up to individual business interpretation; it also doesn’t explain what action they should take.

Our scores are different. Using a sophisticated algorithm, our financial risk monitoring platform rates healthy companies as ‘Gold', ‘Silver’ or ‘Bronze’, while companies at risk of insolvency are given ‘One Red Flag’, ‘Two Red Flags’ or ‘Three Red Flags’. We also recommend actions you may wish to take when dealing with a company, depending on their score.

Here’s a breakdown of our scores and what they mean:

• Gold – these are the top-rated companies and carry the lowest amount of risk of going insolvent.

• Silver – whilst not as strong as gold, these are solid companies representing a low risk and have a low chance of going insolvent.

• Bronze – passed our scorecard and are deemed as healthy but are the lowest band to have done so. These companies still have a low chance of failure but are less financially stable than Gold and Silver.

• One Red Flag – have not passed our scorecard’s threshold to be described as healthy. They have a much higher chance of failure than bronze companies and represent a moderate risk.

• Two Red Flags – have a high chance of failure and represent a significant risk.

• Three Red Flags – represent the most significant financial risk and are on the verge of being declared insolvent.

Providing credit scoring to small businesses and enterprise companies. 

Our data and scoring methodology are more advanced than any of our bigger competitors; because of this, we’re trusted by organisations that represent thousands of businesses, including:

• Greater Manchester Combined Authority (GMCA)
  • City region with more than 2.8 million people and an economy bigger than Wales.
  • Local enterprise partnership supports businesses in the region and helps stimulate its economy.
  • RFA provides LEP with the data they need to make good economic policy and industry strategy decisions.
  • Authority’s growth advisors also use RFA when visiting businesses and areas.
  • We help them identify which areas, businesses, or sectors would benefit most from local authority support.
• National Association of Commercial Finance Brokers (NACFB)
  • NACFB is the UK’s largest trade association that represents commercial finance brokers.
  • Understanding business risk is critical for their members.
  • NACFB partnered with us to offer all their members limited free access to Red Flag Alert’s credit scores, data, and AML services.

What Goes into RFA’s Scores?

Our database contains over 100 data points on every UK business. Our algorithm uses this information to make accurate predictions. These data points include:

• Fixed charges 
• Accounting period changes
• Liquidity ratios
• Micro-entities
• London Stock Exchange profit warnings
• Unadvertised petitions (UAPs)
• Precise SIC codes
• Rapid County Court Judgements (CCJs)
• Direct access to Companies House
• Growth score
• Estimated turnover.
• Real-time dynamic credit scoring

Why You Need Red Flag Alert’s Credit Ratings in the Current Climate

The few years have been tumultuous for the UK economy, and many sectors are under huge financial pressure. Global events continue to exacerbate this. For example, the global supply chain crisis is causing construction projects to be delayed, leading to cash flow issues in the sector – for more in-depth insights into the UK economy check out our recent article, UK insolvency hits highest rates since 2009.

With such a fragile economy, you can’t afford to lose key customers and suppliers. It’s critical that you protect your business by monitoring its financial health and acting early. Red Flag Alert’s credit scoring service tells you which companies pose a risk to your business long before a problem arises—rather than when it’s too late.

If you are worried about the financial health of your customers and want to see how Red Flag Alert can help, start a free trial today.