Changes to consumer credit reporting in Australia may affect the ability of sole traders to obtain credit for their business, whether they be applying for a commercial loan, seeking working capital finance, or leasing equipment.
Here’s what you need to know.
What has changed?
The changes relate to the contents of your personal credit report, a document that is compiled by a credit reporting body and used by banks and other lenders when you apply for credit to assess your ability to pay it back.
In the past, your credit report included limited information such as the applications for personal or business loans you had made and whether you had a default—meaning you had fallen at least 60 days behind with a repayment—but now it can also tell lenders how much personal debt you have and how well you pay your personal credit card and other loan accounts.
This extra information, known as comprehensive credit reporting (CCR) data, gives lenders a better picture of whether you are in a position to take on new debt, and whether you manage your debt responsibly.
How does this affect my business?
When banks or other lenders are deciding whether to extend finance to your business, and how much to lend, they may ask your permission to access your personal credit report. This can help them assess your financial health and therefore your ability to pay back any new debt. Lenders who look at your credit report when you apply for a loan for your business may see how much personal debt you have and may also see a 24-month history of your payments on that personal debt. A good repayment history on your personal finance will help your chances of getting credit for your business.
If you’ve fallen behind by a few payments on your personal debt, or you’ve missed payments on a few loans, this may make the lender worried that you won’t able to repay the new business loan. However, this can be improved by making sure you get back on track with your payments.
As well as lenders, suppliers may want to see your credit report before renting you equipment or providing you with goods or services on a delayed payment basis. Depending on the type of supplier, they may also see how much personal debt you have and the 24-month history of your payments on that personal debt. If they see that you are behind with your payments on existing personal credit, they may see you as a high-risk customer and either decline to do business with you or impose stricter payment requirements, such as requiring cash on delivery.
What should I do?
- Check your credit report regularly. Everyone can obtain a free copy once a year from each of the credit reporting bodies.
- If you see anything wrong with your credit report, contact your lender or a credit reporting body. You have a legal right to have any errors fixed for free.
- Make your repayments on time. If you are worried about forgetting to make a payment, talk to your lenders about setting up automatic payments—this saves having to remember each time, especially if you get busy or go on holiday. If you do get a couple of days behind on a payment, that’s not too big a deal. Under the law, your lender will report your payment was ‘on time’ provided you made it within 14 days of the due date. But keep in mind that you might still be charged a late fee or more interest or miss your opportunity to have ‘interest-free days’ on your credit card.
- If you are struggling to make a payment on a home loan, personal loan or credit card, contact your credit provider. Lenders and many other types of credit providers are required to assess you for a ‘hardship variation’ if you ask for help. Depending on your circumstances, the credit provider may agree to change your payment terms to give you more time to pay, or to reduce what you are required to pay. (This legal obligation doesn’t apply to business loans, but lenders may be flexible, so you should approach them to see if they will assist.)
Bank loans and other forms of credit can be crucial for growing a small business. That’s why it’s important to be aware of your personal credit health to ensure that it positively supports your business goals. Now, more than ever, it’s important to get credit smart and make sure you are across the changes to the credit reporting system and the state of your own credit record—and take any necessary steps to optimise your credit health and that of your business.