1 Understanding Credit Risk a guide for small and medium-sized businesses
2 What is Credit Risk? Amid increasing media coverage and confusion about credit and supply, npower has created this guide for small and medium sized businesses. It will help you to better understand Credit Risk, how it is calculated, what level of risk you present and how we can work with your business to mitigate it. Once Credit Risk has been calculated, suppliers can make an informed decision about supplying a business. We assess all potential new customers and continually monitor the Credit Risk of all existing customers. Credit Risk refers to the danger that your business won t be able to meet its contractual payment obligations. It is calculated by assessing: What is Counterparty Risk? Counterparty Risk refers to the danger a customer won t meet its contractual obligations, usually concerning payment. An assessment is typically based on a customer s credit score, which is a numerical expression of their creditworthiness, the result of statistical analysis of their credit history and files. Many credit reference agencies allow businesses to check their credit reports online and offer advice on how to improve credit score. When assessing credit, we use scores provided by credit reference agencies. Counterparty Risk may also be based on an assessment of statutory accounts, although management accounts can also be taken into consideration, which can provide a more recent financial profile of your business. Counterparty Risk and Settlement Exposure. When assessing Counterparty Risk we consider: External credit score. Industry and economic trends. Material Adverse Change when a customer s credit status materially declines. Statutory Accounts. Management Accounts. Counterparty Risk is assessed alongside Settlement Exposure.
3 What is Settlement Exposure? Settlement Exposure is based on energy delivered, but not yet paid for. When assessing Settlement Exposure we consider: volume unit rates payment terms and deal duration. How it works Settlement exposure Debt Chase Exposure Energy delivered but not yet paid for Month 1 Month 2 Month 3 Month 4 Month 5 Bill generated for the next 30 days usage Bill generated for the next 30 days usage Time Bill generated for the next 30 days usage Bill generated for the next 30 days usage Termination & Disconnection Payment received Payment received Missed Payment Missed Payment
4 Settlement Exposure typically consists of 30 days supply for monthly billed customers and 90 days supply for quarterly billed customers, three days creating and sending the invoice and 14 days payment (dependent upon payment terms). By the time payment is received supply is already into month two for monthly billed and month four for quarterly billed, which is why Settlement Exposure never returns to zero. When factoring in time taken to chase missed payments and potentially disconnecting supply (six weeks), peak Settlement Exposure amounts to about three months consumption for monthly billed customers and about six months consumption for quarterly billed customers. Energy is unique when compared to other supplied goods. For example, in retail, even when ordered on account, if payment is not received, no further goods are supplied until the debt is paid. Energy suppliers cannot cease delivering energy to your business immediately after a payment is missed. Therefore, Settlement Exposure increases as energy continues to be delivered, but not paid for. Questions we consider: What is the amount and value of unpaid energy we could supply to your business up until disconnection? What does your payment history look like and how likely are you to miss a payment? Will your business still be trading to take the energy you are asking us to buy in 12 months time?
5 Mitigating Credit Risk As a responsible supplier, we need to be confident our customers can afford to pay for their energy supply, which is why our checks are thorough. We encourage an open dialogue with our customers about their credit issues and support them when they seek potential credit risk mitigators. There are various ways to improve your credit position, from simply paying on time to using suitable credit mitigation tools such as: Credit Insurance (typically for larger users). Security Deposit money requested by npower to offset any final account outstanding debt if a customer fails to meet its contractual obligations. This can be in the form of cash or a letter of credit. Payment method by direct debit. Parent Company Guarantee (PCG). Advance Payment Products. Increased Payment Frequency. Change the billing frequency move customers onto monthly billing instead of quarterly billing. Some tools can be used by your supplier on their own or combined to suit different requirements. It is important to work with your energy supplier so they can determine the most suitable credit mitigation tools for your business. At the point of customer take on, we reserve the right to decline business based on credit risk Use of credit reference agencies We may: conduct searches with credit reference, regulatory and/or fraud prevention agencies for information about you, your business and any other people you are applying with in order to help us make decisions about your ability and that of your business to make payments for the goods and services we can offer you; and together with other organisations, access and use information that credit reference, regulatory and/or fraud prevention agencies give us about you and your business (for example, to verify application details, to help prevent and detect fraud, to manage accounts or services, and to recover debt); and send information about your account and how you manage it to credit reference, regulatory and/or fraud prevention agencies and they may record this information (this may include sharing your account details including information about your payment history and any late or non-payment of bills which may be recorded by credit reference agencies as a debt). When a credit reference agency receives a search from us, they will record this on your credit file (whether your application is successful or not). Credit reference, regulatory and/or fraud prevention agencies may share information that we give them about you and your account with other organisations
6 (including commercial organisations and business such as other utility companies, telecommunications and financial services companies) and agencies in order that they can carry out checks and deal with any debt you or your business may have. Credit reference agencies may keep a record of any debt registered on your file for up to six years after your account with us has been closed (whether or not that debt was settled or action was taken against you to recover that debt). If you provide details on another person on your application you must have their consent to the use of their information. You acknowledge on their behalf that any credit search carried out may also be recorded on their credit file (whether the application is successful or not). If you give us false or inaccurate information and we suspect fraud, we will pass your details to credit reference, regulatory, fraud prevention or law enforcement agencies (such as the police and HM Revenue & Customs). For further information about how your information may be used by npower please refer to Condition 16 (Data Protection) of our Conditions of Supply for Small and Medium Enterprises. What happens when credit reference agencies receive a search request from npower? They place a credit search footprint on your company credit file, regardless of whether the application proceeds. If the search was for a credit application, the record of that search (but not the name of the organisation that carried it out) can be seen by other organisations when your business applies for credit in the future. The agency will also place an enquiry search on the personal credit files of any director/owner or partner who has been searched and place an associate enquiry search on their personal financial partner s credit file, if checked. These enquiry searches will not be seen by other organisations if any director/owner or partner applies for credit in the future. Previous and subsequent names advised by you of those party to the account will be linked. An enquiry or identification search will be placed on the record of any shareholder who is a beneficial owner we have checked. A record of the name and address of your business and its proprietors will be created, if there is not one already.
7 What information do we receive from credit reference agencies? Information about previous applications for credit, accounts conduct and similar personal credit information in your name and any business partners. Public information such as County Court Judgements (CCJs) and bankruptcies.. Electoral Register information about you and any business partners. Fraud-prevention information. Confirmation (or otherwise) that residential addresses supplied by directors match those on the restricted register held at Companies House (or for those directors addresses registered under section 243 of the Companies Act, that the usual residential addresses supplied by directors match those on the credit reference agency s proprietary business directory). Your data will NOT be used by credit reference agencies to create a blacklist. The information we and other organisations supply to credit reference agencies about you, any partners and your business can be passed on to other organisations and used by them to: Prevent crime, fraud and money laundering by, for example, checking details given on applications for credit, credit-related and other facilities. Check the operation of credit and creditrelated accounts. Verify your identity if you or your business partner(s) applies for other facilities. Make decisions on credit and creditrelated services about you and/or your business partner or your business. Manage your personal, business partner s and/or business credit or credit-related account(s). Trace your whereabouts and recover debts you owe. Undertake statistical analysis and system testing. npower is a registered trademark and a trading name of npower Limited (registered in England and Wales No ), Npower Commercial Gas Limited (registered in England and Wales No ), Npower Direct Limited (registered in England and Wales No ) and associated companies. Registered Office: Windmill Hill,
8 npower is a registered trademark and a trading name of Npower Limited (registered in England and Wales No ) and Npower Commercial Gas Limited (registered in England and Wales No ) and associated companies. Registered Office: Windmill Hill Business Park, Whitehill Way, Swindon, SN5 6PB. npm7168/rf12769/12.12