What’s the difference between a health rating and a credit limit?

Before entering into any sort of financial or professional arrangement with another business, it is crucial to undertake a necessary amount of due diligence. Taking the steps to investigate anyone associated with your business protects you from bad debt or getting involved with anything suspicious or illegal.

Health ratings and credit limits are vital for a basic understanding of a company’s financial situation; they play a major role in risk assessment and due diligence. Implementing these precautions allows individuals to make data-driven, informed decisions to assess financial responsibility, and protect themselves and their business from the risks of bad debt.

What is a health rating?

Our unique health rating system places companies in clearly defined brackets of financial health. Rather than using a 0 -100 credit scoring system, which can be confusing and interpreted differently between staff members, our health ratings allow all staff across your business to quickly understand the level of risk a business poses and the overall state of its finances. Not only is our health rating system easier to understand than a traditional credit score but allows for greater uniformity of risk decision-making across staff and departments in your business.

At Red Flag Alert, we give businesses a rating based on a multitude of factors, and we often predict insolvency before many of our competitors. Our health ratings go from ‘Gold’ all the way to ‘3 Red Flags’, with Gold being the companies showing financial stability, high levels of wealth and substantial growth, and 3 Red Flags displaying signs of great distress, highly likely to go insolvent.

We recently changed our scorecard to make it even more accurate, the highest currently available on the UK market at 92%.

What is a credit limit?

A credit limit is a recommendation of the total amount of credit that is safe to offer a business. It is estimated using our proprietary algorithm that calculates a safe credit amount based on an in-depth analysis of a company’s financial information.

“In simple terms, a Red Flag Alert credit limit is the figure we give as an advisory total for the amount someone can lend to you,” says Beth (RFA Data Scientist). “We base it off how much money you can realistically pay back. For example, if we say you can have a limit of £5000, our algorithm states that this is the amount you can comfortably repay when your assets and affordability are taken into consideration.” 

“We factor multiple things into calculating your credit limit,” says Beth. “We typically use a combination of financial indicators, along with information on trade creditors. These include determining your ability to pay and calculating your affordability, amongst other things. Our multifaceted approach substantially increases the accuracy of our credit limits for businesses in the UK and beyond.”

Credit limits are important as they can protect you from bad debt and ensure you do not undertake too much borrowing. We recently updated our credit limits to offer a better reflection for companies listed within our database and give more accurate financial estimations for our users.

What makes our ratings and limits so accurate?

Red Flag Alert has over 20 years of accurately rating company financial health and predicting insolvency. Originally created by Begbies Traynor, the UK’s largest insolvency firm, we built on a foundation of expert knowledge of the signs of business risk. We are now a separate company, and the UK’s only independent credit reference agency, but still maintain the UK’s premier insolvency score that was the first to predict such high-profile failures as Carillion and Arcadia Group.

We believe that to make informed decisions you need data that is both accurate and up to date. To make that possible we not only bring you data that is in-depth and accurate but also lead the market in the speed that we bring data to our customers. So you can be sure that our health ratings are the most accurate representation of a company as it exists today.

The economy is ever changing and the threats and opportunities to businesses change with it. We regularly performance test our algorithm and make any adjustments necessary to account for economic trends, such as our recent release of the first COVID-adjusted scorecard in the UK.

How can this help protect me from insolvency?

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. Using our health ratings and credit limits to analyse any companies that are connected to your business, will help protect you from this risk. 

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. Using this, alongside our health rating system and credit limit assessments, provides you with a full financial history of every business in the UK. 

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.