Know the Score – What you need to know about Credit Scores

Your credit score is just one of the pieces of information that lenders (and other creditors like trade suppliers or landlords) look at when considering whether to do business with you. For most people a credit score is a bit like their appendix, they’re pretty sure they’ve got one, but they’d struggle to tell you exactly what it is, and it’s never really a problem… right up to the point where it suddenly is.

Your credit score can have a significant impact on your ability to obtain any sort of debt, and as a consequence a flow-on impact in your ability to start or grow your business. In this article I’m going to try to explain a little bit about how credit scores are calculated, why they matter, and how you can keep better control of yours.

Firstly, what is a credit score? A credit score is simply a number on a scale, usually between 0 and somewhere around 1000 (depending on which company is doing the scoring). The score is just one part of a Credit Report which will also capture things like payment defaults, court actions, bankruptcies and more. Almost every lender or business that feels they’re taking credit risk on you or your business will use that score, along with other information, to decide whether you represent a good risk.

Where do credit scores come from? The overarching term is Credit Reporting Agencies, or Credit Bureaus. In practical terms across Australia and New Zealand that usually means either Equifax (formerly VEDA), Illion (formerly Dun & Bradstreet), or Centrix. These companies collect information about businesses and individuals from a variety of sources, and then charge other authorised users a fee to access that information. It’s worth noting that as an individual you generally have a right to access and correct information held about you (but they might not make it easy).

How did you get a credit score? If you’ve ever obtained any sort of credit, you’ll almost certainly have a credit score with at least one of the Credit Reporting Agencies. This could have been anything from a pay-as-you go phone, to a car loan or mortgage. The very first time this happened your file will have been created with one of the agencies. Believe it or not this is actually a good thing, because having no credit file can be seen as being just as bad as (or sometimes even worse than) having a poor credit file, particularly if you’re out of your late teens. Once you have a credit file, any new enquiries are added to it over time, building up a picture of who you borrow from, how much, and how often.

So, how is the score calculated? Scores differ between businesses and individuals, and none of the credit bureaus will tell you exactly how they calculate their particular score, but some things are fairly consistent:

General Factors – Things like your age, tenure with your current employer, and the amount of time you’ve spent at your current address can all be used as part of assessing your risk profile.

Type of credit – Some types of credit may impact scores more than others. For example, a mortgage enquiry might impact your score differently to a personal loan, and a credit card might be different again.

Number of enquiries – Often referred to as shopping patterns, the number of enquiries and the time period they occur over can impact your score. As a general rule lots of credit enquiries over a short period of a time can have a considerable negative impact on your credit score.

Defaults – This is a big one, if you’ve ever failed to pay a debt and just ignored the problem, then chances are pretty high it will eventually end up on your credit file. The size of the debt, how long ago it was, and what sort of business it was owed to, can all impact your credit score to a greater or lesser degree. The biggest impact however will come from whether the debt was eventually paid or not. Into this category I’d also add things like court writs or default judgements.

And then came Comprehensive Credit Reporting. As you might have gleaned, a significant portion of credit reporting is about things that may reduce your credit score, or what might be termed ‘black marks’ on a credit file, however that is starting to change. Although it’s been around a while (since 2012 for NZ and 2014 for Australia), Comprehensive Credit Reporting (or CCR for short) is still in its infancy. CCR allows for much more information to be collected and shared by credit bureaus, theoretically to give a more balanced view of an individual’s credit history.

With CCR information such as whether you actually obtained credit (rather than just knowing you applied for it), as well as payment history and credit limits can be shared. This is meant to give greater insights into not just how much credit you’ve applied for, or where things have gone very wrong, and instead show if you’re keeping up with all of your commitments and whether you’ve currently taken on what might be considered too much debt.

So, what can you do to protect your credit score / credit file?

The most obvious thing is to make sure you don’t default on your payment obligations. If you have run into financial trouble or a dispute it’s far better to address it before the problem hits your file. Don’t just avoid debt collectors or parties you owe money to, instead try to come to some arrangement with them. Many providers will accept a negotiated settlement for a debt and refrain from listing a default by agreement.

If you do have a default on your file it will have a far greater impact on your credit score if it remains unpaid. Again, you may be able to negotiate a settlement with the party that listed the default, most businesses would rather get some of the debt paid than none of it.

Time may not heal all wounds, but it can eventually heal most things on your credit file. If you’re thinking about starting a business next year but you still have an unpaid default on your file, pay it now. The further back in history a black mark is, the less it will count against you (everyone can change right?).

Limit your shopping around. If you’re looking for finance be careful how many places you apply with, and if you’re working with a finance broker ask them how they minimise the number of enquiries on your file. Most good finance brokers will put in the effort to match your requirements with a lender that’s more likely to approve you, which can make a big difference.

You should also take care with the types of credit you apply for or obtain. Multiple enquiries from credit card providers, short-term lenders, or pay-day lenders can all negatively impact your credit score.

If you can, pay your bills on time. With CCR it’s now more important than ever to make sure that you pay your bills on time. It might not make a big difference if you drag out the bill for last Thursday’s morning tea with the café downstairs, but for things like loans and utilities you can expect they will soon be reporting your ‘Average Late Payment Days’ if they’re not already.

Whilst the scores differ somewhat between them, it’s fair to say that a score below 300 is going to be a significant impediment to obtaining most credit. 300 to 500 will be seen as poor or below average and may make some credit difficult or more expensive. 500 to 700 you’re middle of the road. And up above 700 you’re going to be considered a fairly safe bet.

If you’d like to check your own credit score, you can visit the websites for Equifax, Illion, or Centrix; generally these providers will provide individuals with their own personal credit reports free of charge. And if you do find a mistake impacting your credit file make sure you get it cleared up asap! You never know when you’ll need your credit score, but you definitely want it to be at its best when you do.

– Phil Chaplin, CEO

Accessing Business Finance With No Property Backing

There is no doubt that access to funds has been a major barrier to small business ownership for a long time, and over the fast few years the complex application requirements of the big banks have become more restrictive. Recently, the Australian Bureau of Statistics reported that 1 in 3 Australians don’t own a home. The increasing volatility of the country’s property market means that home ownership is becoming increasingly unattainable, and further those who do own property are struggling as property values fluctuate.

Even though 60% of small business owners are looking for funds to grow their business, the concern of property backing is becoming an increasing challenge. This is where non-bank lenders and alternative finance providers can help. Whilst such lenders have always played an important role in bridging the gap between the offerings of traditional banks and the varied needs of small business owners, their role in Australia’s lending landscape is becoming more important than ever.

Non-bank lenders are experiencing a steep rise in adoption rates. Though many are unable to compete with traditional providers on interest rate, they offer a wealth of other benefits which appeal to small business borrowers. Quicker and simpler application processes, reduced paperwork, flexibility and transparency were among some of the favour characteristics of alternative lenders. However most notably, non-bank lenders willingness to secure against business assets rather than personal property assets has been a key differentiator.

Whilst banks are still resistant to offer business loans which don’t take personal property as security, the flexible funding options of non-bank funders are more aligned with the circumstance of many of Australia’s small business owners. Whilst it is likely that borrows will have to compromise on rate, studies found that this is not a major concern. A recent SME Growth index found that a hopping 91% of SMEs would be willing to pay a higher interest rate to avoid using their home as security. This percentage reflects the impact that Australia’s property market is having on business owners.

The key takeaway is that if you are not a homeowner, or you don’t want to risk your home as security, there are options out there to suit you. Whilst banks and traditional lenders are a staple of Australia’s lending landscape, small business owners should consider non-bank and alternative funding sources that may be a better fit for their business finance needs.

Why We Love Relationship Based Lending

Relationship based lending is not a concept that is new to Australia’s finance industry. But as our small business community saw significant periods of growth, the philosophy at the core of this concept has been somewhat lost by big lenders.

Relationship based lending is built upon the idea that finance providers should take into consideration a broader scope of information than just an applicant’s financial history. Incorporating more factors, both qualitative and quantitative, into the lenders assessment means that the funder gains a more in depth understanding of the applicant and their business. This in turn results in a more educated decision in granting funding, an important consideration under responsible lending practices.

Recent disruptions within Australia’s finance industry have resulted in an even more difficult lending landscape for small business owners, in particular franchisees. Many are finding that the finance solutions offered by traditional lenders and banks aren’t the right fit for their businesses unique and ever-changing needs. In addition to this, many banks are moving away from small business and franchise clients due to the perceived risk of the industry. This is reflected by a Banjo Small Business Finance Survey that found for every 10 SMEs applying for bank funding, only 2 were successful.

Small business owners are now turning to alternative finance providers to gain access to funding. Such providers offer more flexible funding solutions that are a better fit for the needs for an SME, and are removing barriers to finance through simple online applications and faster approval processes. Another key characteristic of many alternative lenders that is appealing to the small business community, is the focus on relationship management.

Alternative finance providers are in a unique position due to the flexibility in their financing options. This allows lenders to place a heavy focus on building and maintaining a relationship with their client, and providing funding with a view to long term sustainability through mutual support.

This is a philosophy that Cashflow It wholeheartedly adopts, with a view to not only further the opportunities available to individual franchisees through finance, but contribute to the growth and success of the franchise networks we work with as a whole. We aim to learn about the challenges faced by each network within the industry and tailor a funding solution to fit the needs of its franchisees. Further to this we actively seek out opportunities to become more involved by attending and supporting annual conferences and brand initiatives.

We hope that by us and other lenders in the industry embracing a relationship based lending model that we are able to better service the businesses we work with and help overcome any barriers to finance facing Australia’s franchisees.