If you look up a small company at Companies House, you’ll likely be surprised by the level of information available
You can find the full names of all shareholders, often their addresses as well, the articles of association (terms under which a company operates), and a history of changes to the company’s status.
All of this information has been made freely available via the superb new Companies House website: https://beta.companieshouse.gov.uk
But if you open the actual financial accounts, you’ll most likely be left thinking that they leave a lot to the imagination. Almost certainly, it will be a short balance sheet and not much else. The Companies, Partnership and Groups (Accounts and Reports) Regulations 2015 included audit exemptions for small companies in the UK for all accounts after 1 January 2016.
SMEs qualify if they have at least two of the following:
· An annual turnover of no more than £10.2 million
· Assets worth no more than £5.1 million
· 50 or fewer employees
That means more than 95% of UK companies will be likely to file incomplete accounts at Companies House. In addition, new companies in the UK are not required to file their first set of accounts for 21 months from their incorporation date and private companies aren’t required to file accounts until 9 months after the end of their accounting reference period.
You can see therefore that Companies House records for most small private companies are at best out-of-date and incomplete, and at worst border on useless when it comes to gauging their current financial position.
Most credit bureaus rely on Companies House as their main source of financial information for small private companies, which leaves a significant time gap in which a company’s position may change dramatically, and that change may well not be reflected in their credit score.
Plugging the gap with contributed data
What is contributed data? Essentially any private data that the company can submit to a third party. Typically either internal information that a company uses to measure its own performance or transactional data from a third party like a bank, payment provider or marketplace.
In order to close this time gap between the credit bureau information and now, most SME financial service providers will require additional information in addition to the publicly available reports, usually:
Management accounts — Monthly financial reports that the business prepares itself to measure its own performance and, although unaudited, give an holistic, up-to-date view of a business’s financial performance.
Bank statements / transactional data — A verifiable, third-party report of the income and outgoings of the business.
However, it is very difficult to understand a small business’s bank statement without referring to the accounts — it’s a major part of the reason why SMEs keep complicated systems of accounts. Until very recently, all SME service providers have collected this information by asking for Excel spreadsheets or PDF reports from their customers, which is a tedious, expensive and inaccurate process for both sides.
API contributed data
But in the last few years, the gap has started to be closed with new technology. We have seen rapid adoption of cloud accounting in the UK, and users of cloud accounting packages are increasingly making their data available to third parties via APIs.
And on the banking side, the Open Banking framework aims to create open API standards for transactional data in time for the introduction of PSD2 on the 13th of January 2018. SMEs will be able to authorise others to view their bank transactions automatically.
Credit scoring for small businesses in the UK will be dramatically reshaped by the addition of these contributed data sets. The gap is closing.