How credit scores impact business energy and water supply
Business utility suppliers always consider credit risk when offering a new customer contract. Suppliers perform credit risk analysis to protect themselves against the possibility of unpaid electricity, gas or water bills.
At AquaSwitch, we help businesses switch energy and water suppliers. We always do our best to help our customers navigate the credit check requirements of our suppliers.
Here’s our guide to how credit scores affect business utility contracts.
Why do suppliers need to consider credit scores?
In the deregulated utility markets, the primary function of a business supplier is to purchase electricity, gas or water at the wholesale rate and then provide it to their customers in an agreed contract.
Suppose a customer goes bankrupt or fails to pay a utility bill. In that case, the supplier will still be liable to pay the wholesaler for any electricity, gas or water consumed by their customer, meaning that the business supplier will make a significant financial loss.
Credit risk has become an enormous issue for suppliers during the COVID-19 pandemic as the rates of business failures have increased.
What is credit risk?
- Credit exposure – A measure of how much the supplier would lose if a customer fails to pay a bill. The higher the electricity and water consumption by a customer, the higher the credit exposure.
- Likelihood of default – The probability that a customer will not pay for the electricity, gas or water services consumed. A good indication of the likelihood of customer default is the credit score of that customer.
What is a business credit score?
A credit score to measure the likelihood that a customer will default. A business credit score uses several factors to understand the financial position of a business and its level of financial risk.
A number of different agencies offer credit scores, but their analysis generally depends on the following factors:
- The number of years a company has been trading. The more years you have successfully traded, the safer the company is seen from a credit perspective.
- The number of loan applications the company has made. The more loans a company has sought, the higher the risk that the company is low on cash and is less likely to pay bills.
- The number of past due debts a company currently has outstanding. If the credit agency identifies unpaid registered debts or tax liabilities, it is considered riskier from a credit perspective.
- The payment history of the company. If the company has a strong history of always paying bills on time, it is considered less risky.
How can I improve my business credit score?
It’s common for small companies to be denied business water or business energy tariffs based on credit. Here are some actions that small business owners can take to improve their credit scores:
- File full accounts on Companies House. The greater the public financial disclosure of your company, the more information the credit rating agencies have to determine your company’s credit score.
- Avoid the late payment of tax liabilities. This will help to keep your record of unpaid bills clean.
- Keep Companies House up to date and make all statutory filings on time. The better the publicly available data about your company, the more favourably the credit rating agencies will see your company.
- Try to keep credit applications to a minimum. When seeking a company loan, it is tempting to make lots of separate applications to get the best deal, but be aware that this approach negatively impacts your credit score.
How do credit scores affect switching business water supplier?
When your company chooses to switch business water supplier with AquaSwitch, the following onboarding steps take place:
- You will receive a business water comparison report setting out their options and savings available from switching.
- You choose which supplier and tariff they would like to switch to, asking AquaSwitch to complete the hassle-free switch.
- A member of staff at your company will sign a letter of authority that permits the water supplier to conduct a credit check.
- The water supplier will request the credit score from a credit rating agency and analyse the credit risk associated with the proposed tariff.
Depending on the credit assessment, the business water supplier may:
- Accept the proposed contract and begin onboarding the new company as a customer.
- Suggest an amended payment structure, such as prepayment of bills to reduce their exposure to credit risk.
- Reject the proposed customer based on too much credit risk.
If the proposed tariff is rejected, then our water experts will work with your business to see if any amendments can be made to get it accepted. Alternatively, we can suggest any other suppliers with a higher tolerance for credit risk.
How do credit scores work for sole traders?
Business water contracts are often made with sole traders instead of limited companies. A sole trader is an individual who runs their own business and is self-employed. In the sole trader scenario, the individual is personally liable for paying business water bills.
The only difference in the process for a sole trader is that the individual’s credit score is assessed instead of a business credit score. In assessing personal credit scores, the supplier will often require the history of the individual’s last three years of home addresses.
How do credit scores affect business energy comparison?
Business electricity tariffs are often a much higher value than business water, so credit risk assessment is a much bigger issue for suppliers.
Many business electricity and commercial gas suppliers compete for new customers and have different approaches to accepting credit risk in the energy market. In the energy industry, it is common for business suppliers to adjust their pricing to factor in the credit risk associated with a contract.
In the AquaSwitch business energy comparison service, our energy experts will perform a credit assessment upfront to find the best business electricity prices and business gas prices available to your company, given its industry and credit score.
Business electricity suppliers can request a security deposit or insist on bill settlement by direct debit to reduce their exposure to credit risk.