Risk Scores

ICC Information has developed a range of highly predictive score cards for UK commercial credit risk assessment. The development has been a joint venture between ICC information's Credit analysts and Professor Nick Wilson, Director of the Credit Management Research Centre (CMRC).

The initiative was a major investment and further strengthens ICC Information's already formidable reputation for predictive modelling.

All UK limited companies are assessed for scoring - including companies, which have not filed accounts. A highly predictive model is used to score the extensive unincorporated database.

Features of the ICC Credit Risk Score

• All UK companies are assessed for scoring.
• All UK companies are assigned a credit limit.
• Data used to score non-limited businesses including socio-economic, demographic and industry risk weightings.
• A consistent scoring range of 1 to 100 is assigned to limited and non-limited businesses.
• The commentary on why and how a business has been scored is for limited companies and all non-limited businesses.
• Scoring criteria have been enhanced to provide an accurate analysis of risk.

What is a scoring model?

Commercial risk scoring involves developing scorecards that summarise risk information. Score development is a structured and scientific process with the first stage defining an objective for the model or an 'outcome' that has to be modelled. In the case of commercial risk scoring, the objective is to understand whether a business might experience financial difficulty and ultimately fail (become insolvent or bankrupt).

ICC Information's Credit scoring model

In the course of any one year, approximately 2% of trading companies will become insolvent. ICC Information has sought to establish cards that offer the most robust predictive scores in the UK to help prevent the extension of credit to 'bad' companies.

For ease of use and consistency, the score for each company is presented in the range of 1-100, where 1 represents the highest risk and 100 the lowest risk. Risk is determined as the probability of the company becoming insolvent or bankrupt within the next 12 months. Certain events will trigger an immediate suspension of the score and associated credit limit. This includes notification of insolvency or bankruptcy proceedings and significant CCJ information.

How is the score banded?

ICC Information's unique score can be matched to a Score Guide. The score bandings are:

Limited companies 1-35 Caution. High-risk potential.
36-50 Caution. Moderate Risk Potential. Measured exposure.
51-60 Normal. Limited Risk Potential. Normal terms.
61-100 Confidence. Low Risk Potential.
Non-limited businesses 1-43 Caution. High-risk potential.
44-57 Caution. Moderate Risk Potential. Measured exposure.
58-69 Normal. Limited Risk Potential. Normal terms.
70-100 Confidence. Low Risk Potential.

What is the ICC Information Credit Limit?

The credit limit is an absolute measure of a company's ability to settle potential credit transactions at any given moment.

ICC Credit Limit for limited companies

The basic formulae to provide a credit limit for limited companies remains unchanged and currently gauges the ability by use of the following three values :-

Cash Flow - This is calculated as the Pre-tax Profit of the company plus Depreciation charged against that Profit.
Working Capital - Calculated as the difference between the Total Current Assets and Total Current Liabilities.
Net Worth - Calculated as the Total Assets minus the Total Liabilities where the former is also adjusted to eliminate any Intangible Assets.

The average of these 3 components is then taken as a guide for the credit capacity of the company. The final figure calculated will depend on the previously derived Credit Score. The % applied is directly proportional to credit score, i.e. the greater the score the higher the %. The % applied ranges from 2 to 25.

In addition, the maximum value is capped at £500 million and the minimum value is now £500 unless ICC Information has calculated the limit is either negative or 0.

The credit limits are calculated as a percentage of absolute balance sheet and cash flow value. Credit limits will be adjusted for County Court Judgement information.

The resulting limit should be regarded as a yardstick for the possible level of acceptable credit, or alternatively the maximum amount to be owed by an applicant (customer).

ICC Information's Credit Contract Limit for limited companies

The basic formulae to provide a contract limit for limited companies remains unchanged from the previous ones. However, the maximum value is capped at £500 million and the minimum value is now £500.

The contract limits are calculated as a percentage of Turnover. The latest disclosed Turnover reflects the level of successful contracts completed, hence gives an indication of future capacity. Where Turnover is not disclosed (Abridged Accounts), an estimated figure is used based on asset values and appropriate industry data. This measurement views the applicant as a supplier of goods and services, whereas a credit limit assesses the applicant as a purchaser.

ICC Information's Credit Limit for newly incorporated companies

Depending on the legal status of a company an initial limit of between £500 and £5,000 is given. This initial limit then increases over the course of time but can be revised downwards if adverse data is filed. Once a set of accounts is filed, the normal methodology for limit calculation applies. ICC Information's Credit Risk Score model for non-limited companies

The ICC Information's Credit risk scores for non-limited businesses were developed by analysing data from over 18,000 small businesses over a period of 4 years. The model was structured to predict the eventuality of the business becoming bankrupt within the next 12 months. The database was constructed from the ICC database of non-limited businesses plus data feeds of industry level failure rates and postcode level data. The latter database included socio-economic and geodemographic information, indicators of local economic conditions and incidences of bankruptcy and CCJ's. The database had information on over 1.8 million individual postcodes. The scoring model was developed using logistic regression analysis and analysed over 200 potential predictor variables before specifying the final model. The model was validated on the live sample of ICC Information's non-limited businesses.

The lack of disclosed financial data is overcome by the use of ICC Information company industry data, which is used to estimate the financial strength of the non-limited business.

ICC Information's Credit Limit for non-limited businesses

The credit limit is calculated by taking a percentage of the estimated strength. The percentage to apply is weighted in accordance with the relative risk, as determined by the score. The higher the score (hence lower the risk) the greater the percentage to apply. Credit limits are now assigned to all geographical areas in the UK and Northern Ireland. Credit limits will be adjusted for County Court Judgement information.