[breakoutbox][breakoutbox_title]New law 1[/breakoutbox_title][breakoutbox_excerpt]Credit reporting and credit files[/breakoutbox_excerpt][breakoutbox_content]
When dealing with a small business application for finance, it is standard practice for a lender to look at not only the company’s credit file but also the owner’s individual file. The reasons for this, says Dun & Bradstreet’s director of corporate affaiYrs Danielle Woods, is that the business owner is key to the running of an SME – and the bank’s view is that if the owner manages their personal credit badly, that may well influence the way the company manages its debts.
“People overlook this. They think they are meeting the bank as a business, but their personal record is also important,” says Woods.
Those records will take on added significance when new credit reporting rules are introduced, taking effect from March 2014.
Under current credit reporting rules, a credit reporting agency can include the following information in a credit file: payment on a credit contract is at least 60 days overdue; a cheque for $100 or more has been dishonoured twice; a bankruptcy order has been made against the individual; a credit provider considers that the individual has committed ‘a serious credit infringement’; the individual’s current credit provider status; and details of recent credit inquiries.
Following amendments to the Privacy Act (which covers credit reporting), the new scheme will allow credit reporting agencies to add the following information: the date a credit account was opened; the type of credit account opened; the date a credit account was closed; the current limit of each open credit account; and repayment performance history.
In relation to repayment performance history, what this means is that late payments that are not yet defaults will start to show up. It is possible that a credit provider will put a late payment notice in a credit file if a payment is a day late.
“That is going to be a big change,” says Woods. “The credit file holds two years’ history. All you need is one blip. The same rules will apply to business and personal files.”
Woods says the new rules will also throw more light on late business payments. According to D&B’s Trade Payments Analysis for the 2012 December quarter, 62 per cent of business payments are late. Businesses waited an average of 52 days for payments from other businesses during the quarter. From next year, these late payments will start to show up in credit files. [/breakoutbox_content][/breakoutbox]
Adapting to change
Commonwealth Bank’s executive general manager of corporate financial services, Symon Brewis-Weston, gives business credit for doing a pretty good job of adapting to changed business banking conditions. “Financial institutions ask a lot more questions these days; we are more conservative,” he says. “In the property sector, for example, we will expect the business to operate on a lower gearing ratio and to have more of a buffer for interest cover.”
Brewis-Weston runs CBA’s mid-market business banking unit, which covers companies with annual turnover of $10 million to $100 million. He finds that in today’s market, businesses are better prepared with their finance applications. “They are putting forward better business plans,” he says. “They are doing contingency plans. And they are keeping more cash on hand for security.”
Brewis-Weston says an issue that has become increasingly important in the discussions his team is having with clients is succession planning. The average age of the business owners his division services is 55, and Brewis-Weston says most of them are thinking about exit plans.
“They might own a business turning over $100 million a year, but crystallising that wealth is the biggest problem many of our clients face,” he says. “For a couple of years after the GFC, people held off selling their business. They had an idea of what the business was worth and they thought that if they waited, the market would come back to that level. It hasn’t. People are being more realistic now.”
Dun & Bradstreet’s director of corporate affairs, Danielle Woods, also argues that SMEs should think more carefully about the sort of credit for which they apply. “A lot of small business owners use a personal credit card for business expenses,” she says, “but if they end up with a revolving balance accruing interest, they will be paying 19 or 20 per cent interest.”
The bigger picture
The managing director of market research company DBM Consultants, Dhruba Gupta, believes there is a tendency to overstate the difficulties SMEs have with their banks.
“The negative story has had traction for a while, but some of the research has a narrow sample frame,” says Gupta. “The reality is that maybe only 10 per cent of businesses are looking to borrow at any one time. If we are talking about the 90 per cent of Australian businesses that turn over less than $5 million a year, then it is important to recognise that 70 per cent of them have no business debt. If they have debt, it will come from home equity or a personal credit card.”
Gupta adds that most of these businesses are funding their operations by using retained earnings.
“Among those looking for finance, we don’t see any great degree of difficulty,” she says. “When a business has a good balance sheet and growth prospects, there is not much evidence to show they are having difficulty borrowing. Banks want to lend to these businesses.
“When a business presents to a bank, it needs to show that it is worth investing in. It needs to present a strong balance sheet, good earnings performance and a business plan. It needs to tell a credible story.”
[breakoutbox][breakoutbox_title]New law 2[/breakoutbox_title][breakoutbox_excerpt]Responsible lending[/breakoutbox_excerpt][breakoutbox_content]
Dun & Bradstreet’s director of corporate affairs, Danielle Woods, says planned changes to the Credit Act will impose a requirement for businesses, their bankers and their advisers to think more carefully about the type of credit for which they are applying.
A proposed new law – the National Consumer Credit Protection Amendment (Credit Reform Phase 2) Bill 2012 – will require financiers to lend responsibly to small business, just as 2011 laws required them to do to individuals.
The basis of responsible lending is that the lender must be satisfied that a loan is “not unsuitable” for the applicant. A finance contract is unsuitable if it is likely that the borrower will be unable to meet their payment obligations or the contract does not meet the borrower’s needs.
The arrival of this responsible lending law will introduce a whole new discussion about what type of finance best meets a business’s needs.
That is a discussion advisers can get involved in, although they may have to be licensed under the Australian Securities and Investments Commission’s Australian Credit Licence regime if they start moving into the regulated area of “credit assistance”.
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