New credit reporting laws came into force on 12 March 2014, with major changes in what personal information can be included on an individual’s credit report and how that information can be handled. As a result, credit providers can access much more comprehensive information.
From the minute you get your first credit account, you begin to build a personal credit profile. As you apply for credit cards or a car loan for that Toyota you love, move to different addresses, and make a (hopefully enriching!) life for yourself, your credit profile grows alongside you and paints an increasingly accurate picture of your ability to repay a debt.
Like your personal credit, your business has its own scores too—and those scores paint a different picture of your business’s ability to repay a debt. Both types of scores, personal and business, can be taken into account by lenders to qualify you for financing, loans, and business credit cards. Because your business credit scores have such an effect on your financial health, it’s important to understand what they mean.
Why is a small business credit score important?
Access to credit is the lifeblood of a small business. Even if you’re thinking, “Well, my business is profitable and I have great personal credit, so I don’t think I’ll need to use business credit,” think again! Start-up costs and expansion strategies are expensive, and all businesses are subject to the inevitable ups and downs of cash flow.
Fact: according to ASIC, at least 30% of companies in Australia failed during the 2013-14 financial year due to cashflow issues. 30%!
Using personal credit to build a small business can backfire as well, as you’ll likely need to make more and larger purchases and apply for financing opportunities, both of which can lead to lower personal credit scores.
In addition, a strong business credit score will boost your chances of:
1. Securing loans with the best rates. Banks and online lenders can use your business credit scores to prequalify you for a loan. They’ll often dig deeper into the meat of your business credit reports to determine the likelihood that you will pay back the loan, which can have an effect on your interest rates and how much capital you’re offered.
2. Securing better trade terms with important suppliers in your industry.Businesses with higher business credit scores are often extended better payment terms from vendors and suppliers, such as net-60 or net-90 day terms. Businesses with lower scores might be required to pay on delivery or even prepay, which isn’t so fantastic for your cash flow.
3. Winning business contracts with large companies or the government. If you want to do business with the government or large companies, chances are they will check your business credit and require you to have a minimum business credit score.
Finally, keeping your personal finances and business profile separate will help you to avoid confusion, offer you the opportunity to get away from risky personal guarantees, and in the long run can help you save money while still giving you access to funds that help your business grow.
How can I establish a small business credit score?
Establishing a great small business credit score is not an overnight job. Successful businesses are always the result of patient work and planning, and high business credit scores are no different. Fortunately, many have done it, and the steps to improve your business credit score are similar to that of your personal credit:
1. Pay bills on time, all the time. Pay early if you can. Paying on time will help you land a score of 80 out of 100 for one of the most popular business credit scores, the Dun & Bradstreet score. To score a 100, you will actually have to consistently pay 30 days early.
2. Establish and maintain good relationships with suppliers and vendors. Not only is this a great way to build a solid reputation in your industry, but your suppliers and vendors will also determine whether or not you have favorable payment terms. Make sure your vendors report to the business credit bureaus so your business credit score can reflect your positive payment history.
3. Open a business credit card. Using a business credit card for business expenses instead of your personal one is great for a number of reasons—you’ll protect your personal credit, build your business credit, and you can earn tons of rewards and bonuses with business credit cards. Just like personal credit cards, be sure to keep a low credit utilization to keep your business credit scores up.
4. Monitor your credit. About 25 percent of business owners find errors on their credit reports that put them in a riskier category. If you find errors, be sure to request a correction from the reporting agency.
Where can I get my small business credit scores?
There are three main credit bureaus that can provide you with a small business credit score and a personal credit score — and each one is unique. Whether you’re just learning about business credit scores for the first time or you’ve known about them but haven’t checked up on yours for a while, you can go straight to the individual reporting agencies and pay a fee for your personal and business credit reports— D&B CheckYourCredit, Experian Credit Services and VEDA MyCreditFile.
All three offer a free personal credit report in certain circumstances:
- You can request a copy where a credit application was declined. You must apply within 90 days of the date you were declined
- You can request a copy if you have lodged a correction request and been advised that information on your file has been corrected
- You can request a copy once every 12 months
If you request a free copy of your credit report because you have been declined for credit, you might be asked to supply a copy of the decline notice with your application.
What information can be included on my credit report ?
In the new comprehensive credit reporting system, your credit report may contain the following information about consumer credit that you have been given or have applied for:
- your name, or any alias you use or a previous name, date of birth, gender, current or last known address and two (only) previous addresses, current or last known employer and driver’s licence number
- information that shows you applied for credit, and the type and amount of credit that you applied for
- the date you opened your credit accounts
- the type of credit accounts you opened
- the date a credit account was closed
- the maximum amount of credit available to you under each credit account (and if you get a credit limit increase on a credit card, for example, the new credit limit can be shown)
- basic information about the terms or conditions relating to the credit repayment (such as any maximum term and whether payments are interest-only or principal and interest)
- the name of your credit providers and whether they hold an Australian credit licence
- " default information" (that is, a payment of more than $150 that is at least 60 days overdue and for which you have been served with at least two notices requiring payment)
- information that shows you have paid the full amount of a default , and the date you paid it
- information that shows that, because of a default , you have entered into a new or varied arrangement with that credit provider (or another credit provider )
- information about whether monthly repayments have been paid on time over the past two years (this information can only be supplied and accessed by credit providers that hold an Australian Credit Licence or by an organisation that is considering providing mortgage insurance for a home loan you have applied for)
- publicly available information about your history and activities in relation to consumer credit
- a credit provider’s opinion that you have fraudulently attempted to get credit or fraudulently evaded your obligations to repay credit, or that you do not intend to comply with your repayment obligations (after taking steps to contact you over a period of at least six months and failing to do so)
- court judgements about credit provided to you (or that you applied for)
- information about a bankruptcy, a debt agreement or personal insolvency agreement.
In addition, in the new comprehensive credit reporting system, your credit report may contain information that shows you have applied for commercial credit, and the type and amount of credit you have applied for.
You will also be able to see which credit providers have requested copies of your credit report .
The comprehensive credit reporting system should, over time, give credit providers a clearer and more accurate understanding of your ability to repay debts. For instance, if you’ve had trouble making repayments in the past, this may be balanced with information that shows your repayment behaviour has changed since then, and you have more recently been making your repayments on time.