credit score

The hidden cost of applying for credit

Insights from the CPA's recent SME Finance roundtable in Melbourne

Recently, in a packed room of CPA members in Melbourne, I had the pleasure of participating as part of a panel discussion on the exciting changes sweeping the market for mid-market finance, and how new forms of finance are powering this engine room of our economy.

With over 50 different new online lenders, this new breed of financier are providing everything from quick turn-around loans to working capital finance and equipment finance, and branded as everything from ‘FinTech’ to ‘marketplace’ or ‘peer-to-peer’ lenders. The question on everyone’s lips as they arrived was ‘what do they have to offer to mid-sized businesses?’ 

What we easily agreed was that where online lenders really excel for the mid-market is in their ability to finance unconventional products in unconventional ways. For example, in providing confidential invoice trading facilities, InvoiceX is able to finance accounts receivable on an invoice-by-invoice basis, allowing clients to control their financing costs in real time. As a result, mid-market companies can avoid signing up to onerous contracts associated with invoice factoring where you would typically sign over all of your accounts receivable on a disclosed basis for a year or more.

However, as all of the participants quickly realised, even though the financing process is conducted through the internet more quickly and easily and leverages different forms of security and collateralisation than conventional lending, traditional barriers to access still remain – including the dreaded ‘credit check.’

But this credit check doesn’t need to be dreaded – with a couple of simple steps, you can avoid creating a negative credit picture with the credit bureaux. 

Under the Comprehensive Credit Reporting (CCR) reforms introduced in 2014, banks and other lenders are supposed to share positive credit data, but progress and uptake of positive reporting has been very slow. That’s a pity because it would give a fuller and fairer picture of the credit applicant’s financial health, enabling a positive assessment for good recent credit performance (for example no missed payments in the last 24 months) rather than potentially being denied credit because of a low-value default many years ago. As it stands today, only negative data is available.

It is not widely appreciated that shopping for credit can lead to what is referred to as a high ‘inquiry pattern’ by the credit bureaux. This can have a more detrimental impact on your credit score than their paying more than half of your accounts payable between 1-30 days late. 

Fortunately, through speaking with your advisors, you can ensure you’re avoiding this problem by selecting the right credit provider before applying. By engaging them early in the credit application process to build an accurate credit picture and approaching the most appropriate providers for a decision in principle before formally applying for finance, you can minimise the resultant hit to your credit score. 

With these easy steps you can protect your credit score and over the longer term improve it to access cheaper sources of finance.

Go on, have a chat with your advisor today and get your credit score lean and ready for summer business.

Know your business credit score and be careful shopping for credit

As explained in a recent article on our blog, new credit reporting laws came into force on 12 March 2014, with major changes in what information can be included on a credit report and how that information can be handled. As a result, credit providers can access much more comprehensive information about you and your business.

There are 3 major suppliers of credit scores in Australia: Veda, Experian and Dunn & Bradstreet. Veda is the most commonly used provider and is now owned by Equifax (US). Veda holds data on more than 16.4 million credit-active individuals, 3.6 million on companies and businesses and 3.4 million on Sole Traders throughout Australia.

Your Veda Business Credit Score is a number ranging from -200 to 1200 that summarises how financially risky your business is. The score tells people how likely you are to pay your debts. The higher your Business Credit Score, the lower the risk of your business. The highest score, 1200 means that there is a 0.1% chance that you won’t pay all of your bills in full and on time over the next 12 months. The lowest score -200 means that there is a 94.1% chance that you won’t pay all of your bills in full and on time over the next 12 months.

When you apply for a Business Loan, lenders will use your Business Credit Score as one of their checks to determine whether to lend to your business. This is one of the quickest and most common checks a lender makes, so it is important for you to understand your score and improve it if necessary.

Veda uses complex algorithms and hundreds of data points to build up your Business Credit Score. These include whether you have paid your bills on time, how often you have applied for loans and in what space of time, the types and amounts of loans you have applied for, who the directors of your business are, and how long you have been in business, to name a few. The most important factor in your score is whether you have paid your bills in full and on time.

Anytime you apply for a loan, the lender will look at your credit report to see whether you have repaid your debts in the past. The more you shop for credit, the more this adversely affects your credit score. This is not generally understood by most business owners.

Therefore, it is wise to be careful about who you approach for finance. It is usually a good idea to speak to a well informed broker.

What's a small business credit score?

What's a small business credit score?

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.