The plan is to combine elements of cash and accrual accounting for businesses with revenues under Â£580,000 or less than 10 staff. This most likely will result in less useful financial information being logged, which will in turn make it more difficult for most lenders to make decisions. Accrual accounting makes more sense as a way to show the financial scenario of most businesses because they donâ€™t receive cash on delivery. The data simply isnâ€™t as good.
The government has plans to solve this problem by creating a â€œcredit databaseâ€ by providing the VAT details of SMEs to credit scoring companies. This seems like a good idea, because the credit process is always helped by more data.
However, the credit scores that emerge from different agencies vary dramatically. After all, one of the clearest lessons to be learnt from the crisis was that the rating agencies are by no means infallible. In fact, theyâ€™re susceptible to the same bureaucratic myopia and group-think as the banks.
With information of worse quality being provided to Companies House, agencies have to rely on details from other places, which in the case of small businesses often means the personal credit ratings of the directors. With a worse pool of data, banks will be even less likely to lend.
Inaccurate credit scoring poses a risk to not just lenders, but also supply chains and entrepreneurs. Businesses with great potential for growth may get scuppered when it comes to finance, and some companies may trade with high-risk firms based on a credit score that is too generous.
Given all the uncertainty that is raised by these complicated issues, the small business owners we talk to say that they want simple, clear finance, where they know what theyâ€™ll be able to raise and how, and the bank wonâ€™t pull the rug out from under them just because the credit scorers have made a tweak to their algorithm.
Here at MarketInvoice, weâ€™ve found that thereâ€™s no comparison to the close analysis of the fundamental financials of a company. We look at each application on a case-by-case basis, indeed an invoice-by-invoice basis, to ensure that it meets basic criteria, then we leave pricing to our pool of investors, and we donâ€™t use credit scores. Making finance simpler for small businesses doesnâ€™t necessarily mean less reporting requirements.