Commercial defaults: don’t risk it with your small business
12 September 2013
Credit to fund small businesses can be difficult to obtain, and a credit expert warns it is important to stay under the radar when it comes to your credit file to ensure you are not defaulted when you need it most.
CEO of national credit repair company, MyCRA Graham Doessel, says small businesses can sometimes find repayments a juggling act but when it comes to maintaining a clean credit file it is essential to make sure all accounts are paid on time.
“Running a small business can be a bit of a juggling act especially if revenue isn’t consistent, but despite this, it is essential that systems are developed to ensure accounts are paid prior to the due date regardless,” Mr Doessel says.
He says many people don’t realise the ramifications of paying accounts late. Whether it be a business account or a consumer account – if it more than 60 days late you will likely end up with a default on your credit file. Even one account in default could mean you are either refused credit altogether, or offered a much higher interest rate.
“Many businesses can find the higher interest charges alone can set them back way too much to make expansion or starting up viable,” he says.
“I have a current client trying to fight a mistake on his business credit file which has seen a $1,000 default hinder a $1.4 million loan. Although he has been offered a loan, the 2% interest rate increase for bad credit will mean he has to pay a staggering $28,000 per year in additional interest.”
He adds, that defaults can be made quickly, with less protection for SME’s in the commercial landscape.
“Although many Credit Providers adhere to the 60 days in arrears rule before placing a default on your commercial credit file, technically, they don’t have to. The normal protections consumers are afforded in the Credit Reporting Code of Conduct are not extended to commercial credit,” he warns.
Despite the laws, many of the Ombudsman Services do encourage Credit Providers to give adequate written notice to remedy an account in arrears prior to listing a default.
Ideas to minimise your risk of defaults
1. Pay all accounts on time. You need to have systems in place whereby credit cards and all bills are paid on schedule. 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. Be aware, that repayments to licenced Credit Providers (loans, credit cards etc) which are more than 5 days late will be noted missed on your credit file and listed as a ‘late payment’. These remain on your credit file for 2 years.
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 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.
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. You can do this by visiting www.freecreditrating.com.au.
5. Minimise credit enquiries. If you are not sure about your business’ credit health, run your own check before applying for new credit. You should also minimise credit applications. Some lenders are rejecting loans for as little as two credit enquiries in 30 days, or six enquiries within the year – so it pays to only apply for credit you intend to pursue.
6. Safeguard your consumer credit file. 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? Not only can your credit rating be compromised for five years, 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.
7. 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.
Mr Doessel says 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.
“Choose your credit wisely, choose your clients wisely, and make paying your debts a priority – regardless of the size of your business,” he says.
You can find more information on your credit rating at www.mycra.com.au.
For further comment:
Lisa Brewster – Media Relations Ph 3124 7133 firstname.lastname@example.org
Graham Doessel – CEO MyCRA Ph 3124 7133 www.mycra.com.au www.mycra.com.au/blog
246 Stafford Rd, STAFFORD Qld
Photos available on request.
This Image: David Castillo Dominici/ www.FreeDigitalPhotos.net