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ISCOVER
As a broker, you’re no doubt working with credit files on a weekly, if not daily, basis. As well as providing insights in relation to your clients’ ability to meet any future repayments or financial obligations, lenders see credit files as a vital credit risk assessment tool. But not all people will be as familiar with credit files as you.
In this article, we provide a plain English explanation of credit files from the perspective of a lender, so you can communicate the importance of accessing and maintaining good credit scores or ratings with your clients.
Let’s get into it.
There are two main types of credit files: business and consumer. Whether it’s a business or consumer credit file, the fundamental purpose of a credit file is to help financiers and lenders make a decision on an organisation’s creditworthiness.
Credit files are subject to the Privacy Act (1988), which sets out strict rules and ethical guidelines about who can utilise them, the types of information kept in them, how that information can be used and how it can be accessed.
In Australia, there are a number of credit reporting agencies including Illion, Equifax Experian, and Creditorwatch. These agencies aggregate the information that goes into a credit file and then create a rating — what’s commonly called a credit score. The higher a business’ credit score, the greater (outside of other criteria that a lender might apply in assessing an application) the likelihood that they’ll be approved for access to credit.
For small and medium business owners and directors, a healthy business credit file is essential for accessing capital in the form of lines of credit to overcome cash flow challenges, and loans to take their business to the next level.
There are some important differences between the information contained in a business credit file and a consumer credit file. Let’s look specifically at business credit files.
What is a business credit file and what’s in it?
As we noted above, a business credit file is used by lenders to provide a comprehensive picture of the level of risk involved in lending money or extending credit to a business.
A business credit file contains information like the company's ownership/structure, the size of the business and a general risk profile of the industry in which it operates. It also includes information on existing loans or facilities with other lenders, the amount of credit a company is using (compared to the amount approved by the lender) and records of the business’ repayment history.
Other information that’s found in a business credit files include details of any legal judgements made against the directors including liens and bankruptcies, previous credit defaults, and if administrators have ever been appointed.
Understanding a business credit file
There’s no shortage of reasons why it’s important to understand the information that goes into your client’s business credit file. We’ve already mentioned that lenders and credit providers use the information it contains to assess the risk of lending to their business, so it stands to reason that, as their broker, explaining to them how this information is analysed is a great customer service offering.
Chief Risk Officer at Banjo Andrew Ward says, while lenders are primarily looking at a company’s ability to repay loans on time, they’re also – to be blunt – making an assessment of a business’s intention to repay credit based on past performance.
“We use business credit files to gain insights ‘to a business’ reputation,” he says. “We rely on those credit reports to make informed decisions around providing the business with funds, so there's more of a likelihood that we'll approve a loan if the credit report is healthy.”
Repayment capacity and past performance isn’t the only part of the risk assessment. Andrew explains that a healthy business credit file plays a significant role in the terms that lenders will offer a borrower in their loan.
“Speaking very generally, if you've got a healthy credit report, it gives you a lot more opportunity to get cheaper credit, be offered more flexible terms of repayment, or to extend existing facilities when opportunities come up and you need to go into debt to make the most of them.”
Why is it important for your clients to access their business credit file?
Because of the importance lenders place on a credit file for approving loans and credit, it’s crucial you get your clients to make sure that the information in their report is correct and up to date. Unfortunately, having incorrect information in their file is one of the most common mistakes organisations make.
As Andrew Ward puts it, “You want to make sure that information – whether that is on the business or personal credit file (eg the repayment history or any matters of public record such as mortgages or caveats – is accurate so the business is in the best position to have its highest possible creditworthiness. Unfortunately, having incorrect information in the file is one of the most common mistakes organisations make.”
He says another reason brokers should get their clients to regularly access their business credit file is to keep tabs on the number of credit inquiries that have previously been made under their company's name.
“The theory is, the more inquiries that are made, the more ‘credit hungry’ — for lack of a better phrase — they look, which has the potential to push their overall credit score downwards because it can look like a signal that a business is having financial challenges.”
In the digital age, excessive applications could also be a trigger for identity theft, where cybercriminals are making credit applications in the company’s name.
Lastly, as Andrew explains, the three credit reporting agencies don’t all necessarily keep the same information. There may be different information at each of these bureaus because they may source data from different information providers.
“For example, a telecommunications company might send default information to only one credit bureau,” he continues. “So, it’s important to make sure you've got your eye on the ball when it comes to the accuracy of what’s in a business credit file. You can't just look at one report and necessarily think it's the same information on the other two reports.”
Regularly accessing credit reports will help you and your clients to identify any errors or misrepresentations in their credit file. Credit reporting agencies have a legal responsibility to correct any errors or mistakes that have been added, so as soon as you notice any inaccuracies, get your clients to contact the relevant agency directly to ensure the errors are remedied immediately.
How can a business maintain a healthy credit file?
Andrew says there are some easy steps a business can take to maintain a healthy credit file. Not surprisingly, paying bills, credit facilities or loan prepayments on time is at the top of the list: “That's likely an important factor that credit reporting agencies use information to actually create the credit score in the first place — paying on bills on time.”
Lowering credit limits when the facility is not fully utilised is another important way that a business credit file can be kept healthy. High credit limits can affect the ability to secure credit, even if a business is not using that credit facility or it has a zero balance.
Andrew also recommends that brokers can do a great service for their clients by encouraging them to visit websites like creditsmart.org.au for tips and advice on how to prevent fraudulent activity ending up on their business credit file: “It's a really good source of all things credit scores.”
In conclusion
A business’ credit file serves as a reflection of its financial health and reputation, and a healthy credit file is essential for accessing personal funding or accessing finance to propel business to new levels.
To keep a business credit file healthy, it’s vital that brokers take the time to discuss with their clients why it’s so important for them to prioritise making loan or line of credit repayments on time, that they regularly check the business’ credit file to make sure the information is up to date, and get in touch with the credit reporting agency the minute they find something's not right.
Helping your client’s stay informed and proactive about their credit file is not just smart business; it’s essential.
Work with your SME clients to ensure their business credit file is healthy and accurate. Speak to a Banjo Loan specialist today to explore how time-critical business loan funding can help their business move forward.
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