growth

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.

"We are a young country that has to use its capital smarter" - Don Argus

Some wise words from one of our most experienced business people. Lending to small-medium sized businesses is shrinking at a time where we need them to grow.

There needs to be a real focus on what is constraining growth and the answer is not found talking to economists, we think. Any discussion with the management of a growing business turns to working capital very quickly. No growth finance, no growth.

What keeps former NAB boss and BHP chairman Don Argus up at night?

One of the most experienced executives in the country, Don Argus has concerns about lending standards. Nic Walker

by Stewart Oldfield

What scares the "hell out of" Don Argus, a former chief executive of National Australia Bank and former chairman of BHP Billiton?

Iron ore prices? Interest rate rigging scandals? No. It is interest-only home loans.

"It scares the hell out of me – the size of the debt people are taking on without principal repayments," he says.

The famously forthright executive says banks giving million-dollar home loans to young people had lost perspective. "It used to be very difficult to get a home loan in the old regulated banking environment," he says. "Now it's like a commodity."

According to data compiled by the Australian Prudential Regulation Authority, interest-only mortgage loan approvals peaked at a record 46 per cent of total mortgage loan approvals in the June quarter of last year. 

Since then, their proportion of total mortgage approvals has reduced to 37 per cent, still much higher than the level of five years earlier.

NEGATIVE GEARING

The Reserve Bank said last month that further falls were possible in the proportion of interest-only loans being written as some banks continued to phase in the tighter lending standards being demanded by regulators.

"Some further falls in the share of high-LVR [loan-to-value ratio] lending and interest-only lending in the period ahead could be expected," the RBA says.

Interest-only loans have been particularly popular among those buying homes for investment purposes. Such loans can allow high-income earners to maximise the benefits of negative gearing.

Argus' views on interest-only loans are taken seriously in banking circles because he built his career around being rigorous on lending standards in the late 1980s and early '90s, avoiding the disastrous commercial loan exposures that hobbled his peers.

He was appointed head of NAB's credit bureau in 1986 and took over the top job from Nobby Clarke in October 1990,  remaining in the role until 1999.

He became chairman of what was then called BHP Limited from 1999 until 2010, when he oversaw a tremendous period of expansion as the company reaped the rewards of the resources boom.

INDEBTED CONSUMERS

The level of indebtedness among Australian consumers and the government is a drag on economic growth, according to Argus. This is already being seen as stimulatory monetary policies around the world fail to inspire consumer spending.

 He says Australian consumers are among the most indebted in the developed world and the governments that have been  embracing interest-only loans will leave a terrible legacy for future generations.

Argus says a correction in house prices is inevitable, starting with the apartment market. But he is not predicting a severe credit cycle as last seen in the early '90s when corporate losses and inflated asset values brought several Australian banks to their knees.

"It may not be as severe because bankers these days do understand that free cash flow is important when assessing the risk profile of corporates," he says. 

"But it remains to be seen how their risk-assessment processes stand up when interest rates begin to rise again for small business and consumer customers."

 Argus says a target of a 15 per cent return on equity for banks could prove difficult to sustain. "In today's diminishing return world, one should not forget that our large bank balance sheets rely on funding from offshore markets and this can become expensive at maturity if overseas banks falter in the wake of slower economic growth."

SPOOKED

That said, he believes it is prudent for banks around the world to rely more on tier 1 capital rather than debt instruments such as hybrids, which could be questionable in terms of tax deductibility and subordinated to other forms of funding. 

"You can never have enough equity capital," he says.

Australian banks have been strengthening their capital positions in recent years in anticipation of APRA's measures to address the financial system inquiry's recommendation for their capital ratios to be "unquestionably strong" by international standards. The big banks raised $5 billion of common equity over the past six months. This increased their common equity tier 1 capital to about 10 per cent of risk-weighted assets as of December 2015, 1.25 percentage points higher than a year ago.

The capital positions of some are also being supported by asset sales.

Argus says Australian banks have an important advantage over overseas ones, particularly in the US, given their relatively high level of non-interest-bearing and fixed‑term deposits. He attributes this to Australian consumers still seeing banks as safe havens compared with some of the collapses that have occurred offshore.

He has previously warned that a royal commission into banking conduct in Australia could spook foreign lenders at a time when domestic banks depended enormously on offshore lending.

GEOGRAPHICAL ADVANTAGE

He highlights the strengths of several Australian-listed companies. Macquarie Bank's fee-based business model, he says, is "probably as good an investment banking model that you will see".

BlueScope Steel has successfully reinvented its business model, while Amcor has demonstrated a record of consistent wealth creation. He also applauds Transurban's initiative in taking new infrastructure proposals to the Victorian government.

Argus says Australia's geographical position on the doorstep of Asia ensures the nation has a magnificent future as long as we take full advantage of its strengths, for instance in primary industry, education and health. 

"We are a young country that has to use its capital smarter," he says.

However, he is critical of the performance of governments since 2007. "We have managed to record a series of budget deficits, which leaves us with public debt, which will get the attention of the rating agencies, and the investments undertaken have hardly been productive.

"Going forward, if one thinks that one can ramp up GDP growth by spending billions on non-productive initiatives and promising unfunded activity, which only add to our fragile financial position, then we are in for some rough times ahead."


Read more: http://www.afr.com/personal-finance/shares/what-keeps-former-nab-boss-and-bhp-chairman-don-argus-up-at-night-20160420-goayvr#ixzz49Aqrvks9 
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What could the Government do to fix our Broken Business Banks? And why does it really matter?

Insightful analysis by Alan Kohler in The Australian this weekend on what is holding business back and the negative effects on our economy. Sadly, our politicians seem to be disconnected from the reality of how to manage our economy.

How banks are running the economy

"A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do."

Our view:

The Government could get involved investing modest sums on alternative finance platforms, like the UK Government did 3 years ago with powerful positive effects (and good returns on investment).

That would help overcome people's natural caution and skepticism. People tend to think that banks have some super-natural powers in deciding who is creditworthy. Overseas' experience makes it clear that they are simply expensive, bureaucratic building societies that have lost their way.

My father was a bank manager and retired when the computer took away his discretion. Bank managers in his days had real discretion and could support businesses with their growth plans. We need to re-invent banking by going back to why they came into existence in the first place. It had nothing to do with household mortgages which simply inflated the price of unproductive assets.

 

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Here's a more detailed extract from Alan's article:

APRA, in line with global bank regulators, has also told them to increase their capital ratios, and since the system of risk-weighting means that only a quarter of the value of a real estate mortgage is counted against capital versus 100 per cent of a loan secured only against a business, that means all lending these days is more or less confined to mortgages.

It means the banks are basically not lending to those who don’t own a house or are already fully committed on their mortgages, and those who are building houses for investors.

So they are going elsewhere and paying 10-15 per cent more in interest than the banks would charge, except they’re not.

It means the divide between the haves and have-nots (a house, that is) has never been this great, and it’s also why this week’s rate cut by the Reserve Bank will make no difference and why the government’s efforts in the budget to help small businesses and middle income earners will only scratch the surface.

Banks actually run the economy by both creating money and circulating it, not the RBA or the government, and these days banks are only serving those who have equity in real estate.

According to economist Saul Eslake, home ownership rates among households headed by people aged 25 to 55 have dropped by an average of 9 per cent since 1991.

Most dramatically, the rate of home ownership among 25-34 year olds has fallen from 61 per cent in 1981 to 47 per cent in the latest census.

That is a huge social change: in one generation the number of families starting out and having children who also own their own home has dropped from almost two-thirds to less than half, and in the past 10 years the decline is accelerating.

It means the number of young people able to get a bank loan to start or expand a business, or to get a car loan or personal loan for anything less than 15 per cent interest, has also fallen significantly.

And a lot of that change is caused by the real estate market distortion inherent in negative gearing and the capital gains tax discount, which rewards highly geared property investors at the expense of owner-occupiers, who are in turn paying higher taxes than they otherwise would be in order to fund the subsidy to property investors.

So the combination of high house prices caused, in part, by negative gearing and the capital gains discount, with the transformation of banks into little more than building societies that lend almost exclusively against real estate, is the reason growth is weak.

A small business tax break is worthwhile perhaps, and likewise an RBA rate cut, and in each case it’s really all the government and the central bank can do.

But what’s really crimping entrepreneurship and growth is the post-GFC change to banking.

It means business people looking to expand have to come to Shylocks like your correspondent.

Most don’t bother.

Government waste: bureaucrats teaching us how to grow businesses

Budget 2016: $90m of our money will be spent on workshops for the government to teach entrepreneurs! And tell them how to get a tiny handout. Unbelievable waste!

$10m of that money on our platform would go around 10 times in the next 12 months and help seasoned business people do a $100m more business right now.

 

 

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.