How to check a company before extending credit

Every limited company in the UK files accounts, filing history, and director records at Companies House, and all of it is free to read. Companies House gives you the raw filings and leaves the interpretation to you. A reference agency organises everything into a few screens and charges for the privilege, and for a great many credit decisions, the raw filings are enough once you know what to look for. You search the company by name or number on the register, open its filing history, and find the most recent accounts. Before you open it, it helps to set the expectation, for the majority of small companies you assess, there will be no profit figure at all.

Most small UK companies file under the small companies exemption, lodging only a balance sheet and leaving the profit and loss account off the public record, there is often no revenue line and no profit figure. This is often the most common reason someone gives up on assessing a small company, albeit the figures that predict whether a company will pay you aren’t necessarily in the P&L anyway; profit tells you how last year went rather than whether the business can meet its obligations next quarter. The answer can be seen on the balance sheet, which every company files, no matter how small.

The first reading: do they owe more than they own?

The first reading is whether the company owes more than it owns. The balance sheet sets everything the company owns against everything it owes, and the difference between the two is its net assets. When that figure is positive, the company owns more than it owes and has a cushion to absorb a difficult year. When it is negative, the liabilities have overtaken the business, and it owes more than it could pay back, even if it sold everything it had. A negative net asset position is one of the clearest distress signals you can read from a filing.

The second reading: can they cover what is due?

The second reading is whether the company can cover what is due. The current ratio measures this by setting the cash holdings and the money owed to it against the liabilities falling due within twelve months. A ratio above 1 means short-term resources cover short-term bills, credit policies like to see around 1.5 for comfort, and below 1 means the bills due this year are the larger number.

Net assets and the current ratio together carry most of a credit decision; the first tells you whether the company is solvent, and the second tells you whether it can pay its way in the near term, and both appear on the balance sheet with no profit figure required.

Five questions to ask of any filed accounts

There are five questions worth asking on any set of filed accounts, which are:

• Does the company owe more than it owns?
• Can the company cover the year’s bills, or does it have a current ratio below 1?
• Is the safety margin thin, with liabilities financing almost everything it has?
• Is there a pattern of late filing rather than a single slip?
• Are there multiple serious risk signals stacked up at once?

One of the above is common, whereas two or more present at the same time is the profile that should make you dig deeper before committing. When we scored 100 UK companies that had gone into insolvency, 74% showed two or more of these warning signs at the same time on their last accounts filed while still trading. The build-up was the failure profile, and it was visible in the public record long before the end. You can read the full study in our backtest of 100 insolvencies.

Who is behind the company

The director record at Companies House shows who runs the company, how long they have been there, and what other companies they are or have been involved with. Stable, long-serving leadership with years of tenure and no troubling history is reassuring. Traditionally, the things to watch for are the opposite: short tenures, a churn of directors, disqualifications, or a trail of dissolved companies. One caution belongs here because its counterintuitive; a stable board is a positive signal, but doesn’t ensure protection. In that same study of 100 failed companies, director stability was slightly better than average, with most being steady founder-run firms. A familiar face in charge tells you little about the balance sheet underneath, so the director’s check is best used to confirm a picture rather than to override what the numbers are telling you.

A credit agency score

It is worth being clear about what a credit agency score does and does not provide, whichever agency it comes from. The score is a single proprietary verdict on a scale of its own, blended from inputs the agency does not show you and weighted by a method it does not publish; you are given a conclusion to trust rather than a picture to examine. The moment a company is anything but straightforward the score is where the nuance disappears. A business can carry a respectable score while its filed accounts already show two or more warning signs at once, and because the workings are hidden, nothing about the number tells you that the detail underneath it has turned.

The reason reading the filing yourself beats leaning on the score is that you see the structure of the numbers rather than only the verdict. A debt figure that looks alarming until you realise it is customer prepayments rather than bank borrowing, a current ratio that looks tight until you see it is a seasonal cycle that repeats every year, a single late filing sitting in an otherwise spotless decade, none of these are understood with a single number summary. The context for a decision is in the filing, and a credit agency score by its nature, is the thing that removes that.

Read two years, not one

Often reviewing two sets of accounts is prudent, one is a snapshot, two can show a trend. Assessing the prior year’s accounts alongside the latest and compare, asking whether net assets are growing or shrinking, whether cash has reduced, or whether the company owed less twelve months ago than it does now. Without a profit figure two balance sheets show the direction of travel.

The decision

For a hypothetical customer asking for thirty-day terms, you no longer have to guess. You open the latest accounts and check whether net assets are positive and whether the current ratio clears 1. You run the five warning-sign checks and count how many are present while treating two or more as a reason to look harder. You glance at the board for stability and any red flags, and you pull last year’s accounts to see which way the business is moving. None of it is beyond anyone willing to learn what to look at, and for a single important customer it is well worth doing by hand.

The difficulty is speed, scale and consistency, each assessment requires the same careful approach, and the same person, otherwise a judgement can still drift. A method that works perfectly once is not the same as a process across a whole team, or multiple companies, which can still lead to the interpretation being the leak that lets the bad debt through.

The information you need is almost always on the public record, and the hard part was never the data but knowing what to look at.

Knowing what to look at and reading it consistently every time is exactly what CompanyIQ does for you, the process reads the filed accounts of UK companies, runs these same checks automatically, and returns a clear, scored intelligence report with the warning signs, the balance-sheet readings, and the director assessment laid out, with most analyses completing in 60 to 90 seconds. If you extend credit to UK companies and you want the public record read for you rather than by you, you can run your first analysis at company-iq.co.uk.