One of the things suppliers are always advised to do before agreeing to provide any client with goods or services on account is to check their credit rating.
It’s a simple way to increase your own protection against serial defaulters and outright rip-off merchants. If a company or an individual has a good credit score, it means they haven’t got anything in their past that should give you cause for concern about their ability or intention to pay.
Or that’s the theory at least. Credit ratings are a good guide and have their role to play in good credit control practices. But like most things, there are ways to game the system, and a credit score is therefore no guarantee either of solvency or ethical conduct.
Take the case of one Bilal Mahmood, 26, of Ilford, Essex, who on 20th June 2019 was banned from being involved in the running of a company for 11 years. His misconduct centred around manufacturing an artificially high credit score for his business, which he then used to buy more than a quarter of a million pounds worth of IT equipment - which the business did not have the means to pay for.
In February 2017, Mahmood bought media distribution company Inter Press Corporation and its assets for £10,000, becoming its sole director. The company had in the previous 12 months lost its main contractor and had been slowly wound down, with all employees laid off by the end of 2016.
But a month after acquiring his new venture, Mahmood submitted accounts which, rather miraculously, showed a £380,000 increase in profit compared to the previous year. That excellent financial performance gave an immediate boost to the company’s credit rating, which allowed Mahmood to secure £275,000 worth of IT equipment from 19 different suppliers.
Then, in August 2017, came another twist. Mahmood said the company was insolvent and had ceased trading due to being unable to keep up with payments for the IT equipment - none of which could be located anywhere.
The company was wound up following a petition from creditors in May 2018, the Official Receiver was appointed as liquidator and Mahmood faced investigation over the missing IT equipment. The Official Receiver’s report found he had “massaged accounts” with the result that he was able to artificially inflate the company’s credit score, and had also failed to keep adequate records of his dealings.
On the face of things, the suppliers who sold Mahmood the equipment on credit had done the right thing by carrying out credit checks. Their only mistake was putting too much trust in the results of those checks. Credit score works as a guide, but should not be taken at face value without other due diligence being carried out. As the case of Bilal Mahmood proves, credit ratings are far from invulnerable to manipulation and therefore must be treated with appropriate caution.