A long-term game: What a bad credit score could mean for your business, and how to fix it

If you’ve ever applied for any kind of loan or credit card, chances are you’ve had a credit check done on you. But what does this actually mean, and how does it affect the loan you get? 

Applying for a business loan is stressful enough — it’s something 76% of small business owners find difficult, and the success of your loan application heavily depends on what your credit report looks like. 

Most lenders use credit checks as a quick way to see what you’d be like as a borrower, such as whether you’ve got a history of late payments.

A poor credit score can mean the difference between having a loan approved or rejected.

In fact, having a strong credit profile can have flow-on effects.

• You’ll find a loan more easily, at a lower interest rate, because your lender will feel there’s less risk you’ll default on payment.
• You’ll be better positioned to negotiate better payment terms with your suppliers, giving you extra time to pay your invoices. Those with low credit scores are more likely to be asked to pay upfront or on delivery, which can have a significant effect on business cashflow.
• You’ll have greater success winning large government or corporate contracts because credit checks are often used to assess your financial strength and whether you have the right behaviours to deliver on your side of the contract. 

If you’ve never checked your credit profile, you’re not alone. A MYOB survey found only 7% of small business owners knew their credit score, and only half these owners had checked their score in the last 12 months. 

You’re entitled to a free copy of your credit report once a year from the major Australian credit reporting agencies (the private companies who collect credit information from lenders and credit providers): Equifax, illion and Experian. The Privacy Act set strict guidelines on who can access your information, and while there are some smaller agencies, these are the ones used by the major four Australian banks.

It’s worth checking your report with each agency as they can be different and one could contain an error.

And get your report directly from the source: avoid doing a random search for ‘free credit report’ as there are plenty of scam sites ready to take your personal information.  

Understanding your credit profile

There are two parts to your credit profile: 

• Credit report: information about your credit history, including your current borrowings, the number of credit applications you’ve made, any unpaid or overdue loans, court judgements against you, payment, bankruptcy and default history. 
• Credit score: which is calculated based on your credit report. Each agency has its own formula that ranges from zero to 1,000 or zero to 1,200. The higher the score, the more positive your credit position.

Credit providers, such as your lenders and utility providers (phone, electricity, gas) use these reports to decide whether they will give you a loan or provide you with a service. If you have a questionable credit history, you might be charged a higher rate or receive a lower loan amount because there’s a more risk you can’t pay up on time. 

Credit reporting was historically based on negative events, such as defaults and non-payment, but the comprehensive credit reporting (CCR) regime introduced by the Australian government made it mandatory for the major banks to include additional information about your repayment patterns to provide a more holistic view of your credit background. 

And your credit score is everchanging. While this is partly due to your changes in your financial circumstances, some changes can be out of your control. The major banks uploaded their comprehensive data in September 2019, so everyone’s credit scores will change as a result. 

In essence, if you demonstrate good credit behaviours, like making payments on time, this should be reflected in your credit score. But don’t get caught up on your numerical score is, as ‘the score itself does not matter as much as what was contained in the full report’. 

Check for errors 

Don’t worry about trying to understand how the calculation score itself because maintaining and improving your credit profile is simple, and we’ll look into that below. But do check whether there are mistakes on your report that could affect your ability to get a loan. There have also been cases of identity theft that have been picked up through finding erroneous listings on a credit report.

Sometimes the mistakes are genuine, for example, incorrectly listing a payment more than 60 days overdue, lenders failing to notify you of an outstanding amount, or your credit report not being updated for any payment arrangements or loan amendments that were negotiated. 

If there’s a mistake, contact the credit provider and credit reporting agency as both are legally obligated to correct any errors you bring to their attention free of charge within 30 days or tell you why a correction hasn’t been made. 

If you’re still convinced there’s an error, AFCA or relevant ombudsman scheme for utilities or telecommunications is there to assist. AFCA can order the creditor to ask the credit reporting agency to remove the listing if it’s incorrect or inaccurate.

How to improve your score

There’s little merit in trying to understand the actual calculation of your credit score, because not only is your time better spent focusing on your business, the basics of maintaining a strong credit score are simple.

• Pay your bills on time, especially to big companies and utilities who are more likely to report you for late payments. Bills for $150 or more can be reported as a missed payment if it’s outstanding for more than 60 days.
• Manage your cash flow. Your ability to pay your bills on time comes down to the amount of cash you have, so you’ll take a lot of pressure off yourself if you forward plan. Maintaining a cash reserve so there’s enough money to pay your bills also helps. Your accountant can help you decide on what amount makes sense for your business.
• Make sure you’re paid on time by managing your debtors so you have the cash to pay your bills. 
• Maintaining relationships with your suppliers not only gives you a better chance of securing more favourable payment terms, but you’ll also have a better chance of coming to a mutually agreeable arrangement. They’re less likely to report you to a credit scoring company if you’re open about why you’re late and when you’ll be able to pay. 
• Don’t apply for too many loans unnecessarily because frequent applications over a short period can raise your risk profile and lower your score, so will having more loans over and above what you need. 
• Don’t be scared of debt. Avoiding credit altogether can make it hard for lenders to assess your business, but be sensible and use credit as your business needs it. You generally need a credit enquiry within the last five years to be considered credit active. 
• Separate personal and business by registering your business with ASIC, especially if you’re a sole trader or partnership. Your business credit score is different from your personal one and credit reporting agencies will use commercial indicators for your business report. Having a standalone business credit rating is also important if you want to move away from having to provide personal guarantees on your business facilities. 
• Comply with the terms of your loans and make sure you make payments on time. Communicate early with your lender if you’re having trouble making repayments so you can come to an arrangement that works for both of you. 
• Maintaining an existing facility without any negative reports can also improve your score because it demonstrates your ability to consistently and responsibly use credit all while complying with your all obligations. 
• Keep your business credit card balance in check. A low balance-to-credit limit ratio (such as $1,000 outstanding on a $10,000 limit versus $5,000 outstanding on a $15,000 limit) and consistently low balance can also help your credit score.
• Maintaining different types of loans shows you can manage different types of credit. For example, short-term versus long-term debt, maintaining lease payments and credit cards. But again, be sensible about the debt you have in your business and only borrow what you can comfortably handle.
• Keep an eye on your credit report regularly so you can catch errors early and don’t get caught out when applying for a new loan. Checking your credit profile annually has no effect on your score.

Good credit can take time

Establishing a strong credit profile is a long-term game as payment histories stay on your credit report for two years. Defaults, court judgements notices, debt agreement information and bankruptcies can take up to five years to fall away, with serious infringements taking up to seven years to be removed. 

By diligently managing your business and cashflow, paying your bills on time, complying with the terms of your loans and making sure there are no errors on your report, your credit profile can only improve. 

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