SMEs unfairly ‘penalised’ by credit scoring system, brokers warn

Given that every credit file inquiry reduces the credit score of a borrower, businesses that have a good credit history, but require a large volume of business finance transactions (for example, logistics companies needing vehicles or construction companies requiring equipment) are paying higher interest than they need to or – in some cases – are unable to access finance they need at all.

As such, successful businesses that have flawless tax and repayment records and a solid history are being assessed as if they have poor credit and may not meet the criteria set by top-tier lenders.

Conversely, underperforming businesses with minimal credit prerequisites can navigate through the matrix system quite effortlessly.

‘Businesses are being prosecuted for being successful’

Raising the issue with The Adviser on the Elite Broker podcast, Brendan Scotter, equipment finance broker and director at Commercial Point Finance, explained: “If you’ve got a client who’s growing aggressively and they need to buy a commercial property and they need to buy a lot of equipment and they need cash flow finance, etc … we’re having to reach out to different lenders in different spaces. And each and every time the lender is hitting their credit file for an inquiry to make sure they’re creditworthy.

“If you do 10 transactions with a client and they have 10 credit hits on their file within six months, their credit score might go from 700 to 600. But if you’re in an industry that doesn’t really need to source finance very often, you might have a 900 score [and be able to access a better interest rate]. That’s just unfair.”

Mr Scotter said he had many clients who are “ fabulously successful”, but have a credit score of 500 or below because “they’re just in one of those industries where they need lots of different transactions”.

“These businesses are being prosecuted for being successful,” he said.

“These poor fellas in transport or construction, civil mining, etc. They really struggle with this and you have to fight with the lender to remind them of the fact [they are creditworthy]. So many of the lenders base their decisions very strongly on the credit score of the director or the beneficial owner of the business .... And lenders will give them a lower or a better interest rate if they’ve got a higher credit score.

“But these businesses are getting a 5 per cent increase on a low doc unsecured cash flow loan just because of their credit score. And it’s just unjustified.”

Given that interest rates have risen rapidly in the past year – and there are mounting concerns for the strength of the economy in the year ahead – brokers are concerned that the issue could be holding back growth and causing unnecessary financial stress for SMEs.

Mr Scotter added: “I don’t think I’m being dramatic in saying that on a macro level, it has a huge effect on the business, the health and growth of businesses throughout Australia.”

As such, Mr Scotter urged credit rating agencies and lenders to review how they assess businesses needing large volumes of transactions.

Josh Ugo, asset finance broker and director at Finicky Finance, agreed, stating: “Credit scoring is an important factor that many lenders look at when assessing a loan application. Many lenders have minimum credit scores that they accept (for example, 550). If clients fall below this score, they can be pigeonholed with a more expensive lender.”

He added that comprehensive reporting further amplifies this issue and suggested positive reporting could be extended to commercial finance to benefit more SME borrowers.

“For consumer finance the negative scoring is (somewhat) offset by comprehensive reporting’s positive scoring for loans that are paid on time. Commercial repayments do not receive the same positive scoring,” Mr Ugo told The Adviser.

‘Thus, the director is left with only the negative effects of multiple inquiries.”

Australia needs ‘a system that doesn’t attack the business trying to access capital to grow’: CAFBA

The Commercial & Asset Finance Brokers Association of Australia (CAFBA) has backed the calls for reform, with the chief executive of CAFBA suggesting that a standardised credit reporting market that works in complement with lenders could benefit borrowers.

David Bushby, the CEO of CAFBA, echoed Mr Scotter’s concerns that the credit scoring issue was “made worse for successful businesses who are in a growth phase”.

“Businesses experiencing success/expansion have a greater need for additional equipment; larger premises; and increases in trade accounts, credit insurances, supplier checks, etc,” Mr Bushby told The Adviser.

“None of these is indicative of a poorly performing business, but all of them in aggregate will impact and diminish the borrower’s credit score.

“The role of the broker is to recognise and minimise these risks. The broker will know where each client’s requirement can best be met, so only successful inquiries will be made. And brokers who strategise and foresee client requirements will set up annual revolving credit limits with appropriate lenders, significantly reducing the number of credit inquiries made.

“But the overarching solution would be a system that primarily considers payment history and doesn’t attack the business trying to access capital to grow and create employment and wealth.

“At present, there are three different Equifax and two different illion reporting systems spread across the databases of dozens of lenders.

“By centralising or standardising credit reporting, the market would deliver better outcomes by protecting the files of clients and work in a more complementary way with financiers/funders to ensure a more productive capital solution.”

You can hear more from Brendan Scotter and his thoughts on credit scoring, equipment finance, and his top tips for writing commercial loans in the Elite Broker podcast, below:

Illion and Equifax were both approached for a response for this story, but neither provided commentary.

[Related: SME loan applications surge in 1Q24: Banjo]