Your credit rating is just like your health. You can get regular check ups and maintain it, or you can wait until something goes wrong before you get it fixed. Being aware of your business' credit file history can go a long way to not only keeping it afloat, but allowing for future expansion. GRAHAM DOESSEL addresses some common questions.
WHAT is my credit rating?
Your credit rating is really a file on your personal or business credit history and is collated by the major credit reporting agencies on anyone who has ever been credit-active. Your credit rating is then checked by any financial institution or credit provider and is used to assess both the amount you are able to borrow and your ability to repay the loan.
Do I have a credit file for my business?
Any business that has borrowed money has a credit file. Also, histories of credit of any type including credit cards, mobile phone accounts, retail store credit, and trade credit terms (accounts) with other businesses will be recorded on your company's credit file.
What is defined as a 'bad' credit rating?
In broad terms, any credit defaults, court actions or writs, external administrations and bankruptcy are all recorded on your credit file and would be considered 'bad' credit history by most credit providers.
In this current economic climate basic defaults and even too many credit enquiries or applications for credit may be considered to be tarnishes on your credit rating.
How do I know if I have a bad credit rating?
If you are unsure what is on your credit file, it would be worth taking the time to find out.
There are three major credit reporting agencies in Australia: Veda Advantage – which holds the credit file of over 14 million Australians, Dun and Bradstreet and Tasmanian Collection Service.
You can write to or email one of these agencies and request a copy of your file. If you are not in a hurry there is no charge to you but it will take 10 working days from application to receive this information.
What is not realised by many people is how easy it is to have a default slapped on their file. If a bill is more than 60 days late (including rates, power, mobile phones) then a provider has the right to notify you of their intentions to record this default on your credit file. Even if this bill is paid and noted on your file, this default usually remains on your record for 5 years.
What are the repercussions of having a bad credit rating?
If you find you have a bad credit file, this can severely hamper your chances of expanding your existing business. Your credit health can determine whether you can take out credit cards, set up an account with a supplier, enter into mobile phone plans, buy office furniture under finance or borrow any money with banks for expansion. Your business will need to run on cash-only terms until the problem can be rectified.
A recent report in The Daily Telegraph from August 2, 2010 confirms that obtaining a business loan is very difficult in today's market. They found access to credit to be the biggest obstacle to growth for small and medium-sized businesses. (Please click here to read the story.)
Having blemishes on your company's credit file would make it even more difficult for a company to borrow money from the major banks to expand their business.
What can I do to fix my credit rating?Once you have obtained a report there are three things to consider:
- Check the accuracy of the report. If there are errors, be aware you do have the right to have errors rectified. Likewise, if there are numerous strange defaults and or applications for credit that you don't recognise – you would need to immediately investigate these and notify Police in case of identity fraud.
- Check you were informed of any intention to list. Current legislation requires you to have been informed in writing of any intention from creditors to list you as a defaulting on credit.
- Check the fairness of the listing. Only serious credit infringements should be recorded, or overdue bills in which 60 days has elapsed since payment was due. Be aware that new legislation earmarked for January 2011 may change the rulings on this last point – with the possibility creditors may list defaults after only one day of being late.
Current legislation allows you to work with your credit file and the agencies to clear your record. This involves contacting the creditors, making
them aware of any errors on your credit file and allowing them to verify with the source of the error as to the accuracy of the entry on your file. Once any overdue payments are made, ensure that contact is made with creditors to mark the listing as paid on your record. If a dispute arises, you can then refer your problem to the appropriate Ombudsman in your state.
What is a credit rating repairer?
Increasingly the public are seeking out third party credit file repairers. These clients are often time poor and would prefer to employ someone to negotiate with creditors on their behalf. Others have already had dealings with creditors and have had no luck in removing judgments and defaults from their file.
In many cases where people have attempted to remove the default themselves, they have come across difficulties and defaults have not been cleared. Often the creditor will explain to the client that defaults DONT EVER get removed. The best they can do is mark the listing as paid (if it's been paid). This may not be sufficient to ensure credit is obtained with some lenders.
A credit file repairer usually goes through processes which allow them to access your information without initially alerting the creditors of their intentions. This then allows them to work with the file and having knowledge of current legislation - enable them to actually remove the default. It may be worthwhile discussing your case with a credit file repairer before attempting negotiations with creditors yourself.
Should I try to cut all unnecessary credit from my business?
Credit is not all bad. In fact, not having ever taken out credit can harm your chances of obtaining a business loan just as much as having a bad credit rating. It's all about risk assessment. If you are disciplined, one of the best ways to run a small business is using a business credit card. It is not only a great way of keeping records of spending but keeps that spending within specified limits. It also allows you to build a credit history that can be used to obtain finance in the future Good credit gives you business confidence and the ability for future expansion.
What can I do to ensure I maintain a good credit rating?
- Pay all accounts on time. This is the easiest way to ensure there are no discrepancies or defaults on your credit file. You need to have systems in place whereby credit cards and all bills are paid on schedule if not by you then by administration.
- Regularly obtain a copy of your credit file – once a year is recommended to ensure it is all as it should be.
- Sign up for Veda Advantage's Alert system. For approximately $50 per year they can send you a copy of your credit report and email you of any changes made to your credit file within the 12 months of membership.
- Chase up bounced cheques and failures to pay immediately. Too many accounts left unpaid can leave you short on cash and run your business into the ground if left to continue. Regard any client non payment as potential risks to your credit rating. Develop a tactful system for retrieval ahead of time – reminding clients of the risks to their credit rating by defaulting on payments to you.
- As suggested by Sue Hirst in her article "Why You Need Good Terms of Trade" My Business Magazine August 2010 you should consider implementing a system of credit applications for potential clients who request a major account with you.
- Keep credit card limits within a set budget as specified by the needs of the company. Don't be tempted to set a lofty limit to your credit card as it may just encourage needless spending and blow out your business budget.
- Be aware of excessive credit enquiries. If you are not sure about your credit health, get it checked before applying for new credit. Some lenders are rejecting loans for as little as two enquiries in 30 days, or six enquiries within the year.
- Most importantly, monitor your accounts regularly. If you are the owner of the business but not the person responsible for accounts, ensure you still have hands on knowledge of the business' expenses. Check accounts are being paid, check receipts and credit card statements regularly.
If the credit file has a default, Judgment, Writ or other black mark which is listed incorrectly, unjustly or just shouldn't be there at all, contact MyCRA - they've had up to a 91.7% success rate of removing black marks etc. To contact My CRA Ph: 07 3124 7133