Following a Bank of England-commissioned report, changes will be made to credit data sharing rules. The change to the Principles of Reciprocity (PoR) allow trade credit providers who agree to share their sales ledger data to benefit from the powerful information sent to Experian by banks and finance providers. The move will help to invigorate the trade credit industry, which plays a vital role in the UK, accounting for over half of business financing.
The study found increased data sharing will help 50,000 smaller businesses to receive a recommended credit limit for the first time. As a result of the changes, trade credit limits are projected to increase by a total of £2.4 billion. More than half of businesses will see their credit score increase and 22 per cent of businesses will not experience a change. Only eight per cent of companies will have reduced credit score, along with five per cent experiencing a reduction in their credit limit.
So, how has increased data sharing achieved these improvements?
Historically, trade credit scores and limits accessed by trade credit providers have not included commercial data from banks and other financial intermediaries, which tend to be predominantly positive rather than negative. By including this information to create a fuller data set, the accuracy of the algorithms used by Experian to produce credit scores for trade creditors significantly improves. The scale of this information that will be used to deliver these benefits should not be understated. For the first time, trade credit providers can benefit from insights derived from millions of additional accounts covering tens of billions of pounds of credit.
Business Growth with less risk
Without a doubt, the new data sharing rules are a positive development for both small businesses and trade credit provider alike. Finding ways to borrow money and fund growth is not an easy task for smaller businesses, who are dependent on financing from entrepreneurial investing, crowd funding, peer-to-peer lending, cash advances, grants, or family and friends to assist them in taking their business to the next level. But, the combination of the change in the voluntary data sharing rules and new regulations mandating the sharing of credit data should increase credit availability and limits for thousands of SMEs.
Based on the robust models and methods used by Experian and others to engineer the wider set of available financial commercial information, the data will be more accurate and of a higher quality so trade credit providers are able to make smarter business decisions that involve reduced risk, resulting in lower default rates, and the occurrence of bad debt. And, with an improvement in the efficiency of credit scores and limits, this could have a beneficial impact on the pricing and terms of the trade credit provided. This will remove the obstruction of credit to some smaller businesses, while not inflicting risk on the credit provider. However, the trade credit provider’s real appetite for risk will be based on their willingness to share their own credit data. Under the reformation of the rules which have been managed by SCOR, these trade credit providers will then receive trade credit scores and limits that make full use of the commercial credit data that CRAs have at their disposal. Trade credit providers wishing to access these benefits must ensure their customers are notified about the sharing of their data with a CRA.