Running a small business can be extremely trying. Cash flow can be a problem for many people with a small business, and this in turn can lead to accounts in arrears. If you are unlucky enough to incur a default on your commercial credit file during your business ownership, you could find things extremely difficult. It would be difficult to borrow more money to expand your business, or buy vehicles, or even set up a mobile phone plan. This blacklisting of your credit file can even mean you are forced to sell the business or go bankrupt, or lean heavily on your personal credit file when you need to borrow money. We cover the ways you can get bad credit, and why you should avoid bad credit history attaching itself to your business and your personal life at all costs.

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

An article published recently by Dynamic Business shows there has been a jump in the number of businesses entering external administration:

“According to ASIC figures, the number of businesses entering external administration in the 2011-12 year was up 9.4 percent over the 2010-11 financial year.

CreditorWatch managing director Colin Porter said data collected by his own business suggests a 22.5 percent rise in defaults in 2012, with construction/building, retail, hospitality and printing sectors the hardest hit.

Porter said what’s more worrying is that the value of defaults is also growing, with the average dollar amount of each default registered rising 18.5 percent. This was even more marked in the final three months of the last financial year, with Q4 2011/2012 up 22 percent on Q4 2010/2011.

“June represented the highest number of defaults registered, plus the highest dollar value of the defaults on record,” he added” an excerpt from the article Diligence key to avoiding bad debt.

These are worrying statistics for business owners, particularly when you see the consequences of bad credit.

Why accounts should be paid by the due date

Bad credit can be extremely easy to cop on your commercial credit file. And you may not have the same protections as you do for your personal debts.

Commercial credit reporting is not subject to Part IIIA of the Privacy Act, which governs notification requirements for consumer credit reporting specifically in the Credit Reporting Code of Conduct.

In the Credit Reporting Code of Conduct, an account must be at least 60 days in arrears, and an amount of at least $100 must be outstanding for the Creditor to be able to place the default on the consumer’s credit file.

Whilst commercial credit has provisions in the National Privacy Principles for correction of mistakes, there is no provision for adherence to the Code of Conduct.

So technically, if you are one day late in paying an account, a Creditor may legally be able to place a default on your commercial credit file. Despite the law, many of the Ombudsman Services do encourage Creditors to give adequate written notice to remedy an account in arrears prior to listing a default. But sometimes this issue can be a contentious one when trying to dispute what you consider to be an unfair credit listing.

Ideas to keep the cash flowing so you don’t get in arrears

1. Pay all accounts on time. This is the easiest way to ensure there are no discrepancies or defaults on your credit file.  You need to have systems in place whereby credit cards and all bills are paid on schedule if not by you then by administration. If the business is running behind, creditors need to be contacted and payment plans possibly worked out before the due dates to best avoid a default listing on your credit file. Many industries are tending towards offering those in financial hardship alternative payment arrangements rather than placing a default on the credit file. If you do need to request financial hardship for a case of temporary hardship, you should contact the Creditor in writing. This does not guarantee you will be successful in your request, but the Creditor has a number of days to respond prior to placing a default on your credit file for any accounts in arrears.

2. Ensure all accounts are paid to you on time. Chase up bounced cheques and failures to pay immediately.  Too many accounts left unpaid can leave you short on cash and run your business into the ground if left to continue. Regard any client non-payment as potential risks to your credit rating.  Develop a tactful system for retrieval ahead of time – reminding clients of the risks to their credit rating by defaulting on payments to you. If overdue accounts go beyond 60 days, notify the account holder in writing you will be referring the non-payment to a credit reporting agency.

3. Consider credit checks for all potential account holders. Anyone who requests an account of significant proportions could be required to submit a credit application before the account is instigated. This involves you running a credit check on them with one of the major credit reporting agencies. At the very least, as Porter also recommends, obtain the entity’s correct name and ABN/ACN, and verify that the ABN/ACN is active and is still legally operating.

4. Regularly obtain a copy of your credit file – once a year is recommended to ensure it is all as it should be. If there are any discrepancies or listings which you believe should not be there, address them prior to needing the extra credit for your business. This will mean less stress for you. Clearing unnecessary defaults allows you to get on with your life, and the important business of running your company

5. Keep credit card limits within a set budget as specified by the needs of the company. Don’t be tempted to set a lofty limit to your credit card as it may just encourage needless spending and blow out your business budget.

6. Be aware of excessive credit enquiries. If you are not sure about your credit health, run your own check before applying for new credit.  Some lenders are rejecting loans for as little as two credit enquiries in 30 days, or six enquiries within the year – so it pays not to shop around for credit and to only apply for credit you have an intention of pursuing.

7. Most importantly, monitor your accounts regularly.  If you are the owner of the business but not the person responsible for accounts, ensure you still have hands on knowledge of the business’ expenses.  Check accounts are being paid, check receipts and credit card statements regularly.

In the current economic climate with businesses potentially more likely to pay accounts late, there has never been a more important time to protect your credit rating by being firm with your own and your client’s payments.

Your consumer credit file

SMB’s it can find be tempting to take out credit using your consumer credit rating. Redrawing on the mortgage, and taking out personal loans is evidently quite common amongst small businesses who report finding it difficult to get credit to fund their business in the current market.

Smart Company reported back in June on new research by software firm MYOB showing 28% of small businesses use their home loan to finance their business in some way.

The survey of over 1,000 SMEs, shows how tightly linked mortgage rates and business finance really are.

Just under 15% of SMEs utilise a line of credit through their home loan to help fund their business, 5% have funded their business by increasing the value of their home loan and 5% funded their business by redrawing against equity in their mortgage.

A further 4% have used cash sitting in their mortgage offset account to pump into their business.

The danger with involving personal credit in your small business borrowing is the chance of business debt and bad credit history spilling over to the personal credit rating.

Business is touchy and subjected to many unknowns, but the family home and your consumer credit file should be kept protected. If some major clients go under, and payments are not made – who’s going to help fund your now over-extended mortgage? You will go into a credit lock down of both consumer and commercial credit files. Your access to mainstream credit is virtually nil for the next 5 years. Not only can your credit rating be compromised, but your spouses’ as well. Any new credit will be at sky-high interest rates. You might lose the business, and any opportunities to borrow again for business in the future, but worse, you might lose your family’s ability to borrow at good rates for a mortgage, personal loan, credit cards and even mobile phones.

So to protect your good name – choose your credit wisely, choose your clients wisely, and make paying your debts a priority – regardless of the size of your business.

If your good name has been compromised by bad credit history, and you believe it should not be there, you may be suitable for credit rating repair. Contact a Credit Repair Advisor on 1300 667 218 or visit our website www.mycra.com.au for more information.

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